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The mechanics of how a pension is actually set-up and paid out is probably something that most people have never thought about. With the old final salary schemes, much of this may have happened automatically. But this now contrasts sharply with the reality of defined contribution schemes where individuals face an array of choices that can be overwhelming. With the shift from defined benefit to defined contribution schemes, the responsibility for making informed financial decisions now rests heavily on individuals. This raises the question: are they truly equipped to navigate this intricate landscape?
The shift to defined contribution
Understanding a DC pension can feel akin to solving a Rubik’s Cube blindfolded; with numerous factors to consider including tax implications, product choices, charges, longevity risk, investment risk, income levels, sequencing risk, and cash flow needs.
Given the complexity of these choices, one might expect individuals to seek professional advice. However, the reality is stark: nearly three-quarters (73%) of those in their late 50s have not received any sort of information on pensions or retirement choices in the last three years. Alarmingly, the majority of DC pots accessed for the first time were accessed by people who had not sought any guidance or advice.
The need for professional advice
Professional advice is desirable for making informed decisions at retirement, yet traditional advice models often feel inaccessible and costly. For instance, individuals with a £100,000 pot, may face initial fees ranging from £2,000 to £4,500. This financial barrier may explain the concerning trend revealed by the Financial Conduct Authority (FCA) Retirement Outcomes Review: the percentage of consumers purchasing drawdown products without advice skyrocketed from 5% before Pension Freedoms to 30% in 2016. Fast forward to 2019-2020, and the FCA found that a staggering 50% of pension plans were accessed without any form of advice or guidance.
Consider this: only 29% of 55-59 year-olds report having a clear plan for their retirement, while a staggering 17% are unaware they need to make any choices. The price of freedom is choice. If individuals don’t realise, they need to make one, have we really delivered on the promise of freedom?
Embracing digital solutions
Digital advice has the potential to lower the cost of advice and democratise access to services for all. While there may be some hesitation in trusting digital tools, the Mercer Master Trust’s Destination Retirement service offers access to advice with no initial fee, and thousands of members have already registered for it.
Moreover, AI language models can also enhance member engagement by simulating human interaction. These models can engage members in personalised dialogues driven by their questions, priorities, and pace. It’s 1-2-1 personal financial conversations, at scale.
Mercer’s AI agent, a pension expert trained to draw exclusively on the collective pension content of Mercer and its partners, provides Mercer Master Trust (MMT) members with access to expert pension guidance at their fingertips, day or night. MMT is currently developing and refining this AI agent based on research and user testing, with plans to invite members from selected clients to trial a Beta version via the Mercer Money app.
A decisive approach
Ultimately, Freedom and Choice necessitates informed decision making. The pensions industry must support individuals in making these choices. The Government’s initiative to create ‘targeted support’ services is a step in the right direction but the solutions will need to tackle the twin challenges of complexity and cost. AI and digitisation will be two major factors in developing the solution.
Mercer’s report ‘What’s the Price of Freedom?’, highlights the importance of informed decision-making in retirement planning along with the need for personalised guidance to ensure members have access to the expert advice they require to navigate their retirement journeys confidently.
