Default pathways into retirement need to deliver on multiple fronts. Members will always want a combination of high income, flexibility of withdrawals, death benefits, simplicity and trust. They also want protection against inflation, living too long and underspending, and also cognitive decline. At a recent Corporate Adviser round table, advisers joined Aviva to debate the provider’s new ‘guided retirement’ concept, which separates a retirees’ pension into three pots – 10 per cent for everyday money, 20 per cent to secure an annuity from age 80 and the balance to be run down in drawdown by that age. No solution can offer everything, so product developers need to balance the relative merits of the features on offer.
Advisers were generally supportive of Aviva’s new retirement pathway, designed for retirees with enough money to want to generate an income from it, but not with enough assets to place them in the sweet spot for financial advice. Advisers debated the features of the product and compared its merits with decumulation-only collective DC (CDC).
(click to download the roundtable supplement PDF)
Probability of sustainability
Aon head of DC investment James Monk supported the flexibility that guided retirement offered, but cautioned that users would need to be fully aware of the impact of unsustainable withdrawals on their pots. He said: “It would be helpful for members if, when they set their yield expectation or their income needs that you were able to say that this is the median expected time frame of how long we expect your pot to last, and then you have a percentage probability of achieving that.”
Maiyuresh Rajah, head of investment strategy and propositions, UK at Aviva said that Aviva’s sustainability tool would allow members to do that.
Isio director Matt Calveley asked: “I know this product is all about flexibility, but have you thought about restricting the level of income people can take? If you have a strategy, but they are going to fall short of age 80, this could be a factor.”
Rajah said Aviva is thinking about this but customers are so focused on flexibility that restrictions could go against what people want.
Barnett Waddingham partner Mark Futcher said he backed the idea of having default pathways of this sort, and the guidance towards a sustainable withdrawal rate was a key part of that. “We are talking about defaults here and we are telling people this is the off-the-shelf plan – it’s 15 years and this is the fund and how we have optimised it for that journey and if you deviate from it, it’s not optimal. We need defaults.”
Monk added: “I completely agree with needing defaults but you also need safety nets? If they withdraw 10 per cent of their pot, then they need to know that they’re going to fall short by the age of 80. So if they have a life event, which means that they want to pass on some of this as a gift or something like that, then they need the foresight as to the impact it’s going to have.”
CDC comparisons
Calveley suggested collective DC in decumulation could be a way around some of the challenges presented by guided retirement, and Rajah said that the idea was being looked at by Aviva but that legislation meant it was years away.
Douglas added: “There is certainly lobbying to government on this. Guy Opperman was really keen on it. He is obviously still around but not directly pensions minister. It looks like the next step after Royal Mail will be accumulation for master trusts. But it’s still likely to be a couple of years at least.”
Adviser delegates were asked whether there was enough support to get CDC off the ground, given the vociferous critics against it.
Dunn said: “I think it is a good idea but we don’t have the scale yet. It’s definitely an option for the future.”
Monk said: “There’s a huge amount of benefits driven from risk sharing through longevity pooling. I think liquidity risk can be managed. There is a huge amount you can do within that framework that is similar to defined benefit. There’s a lot of similarities to with profits, which got such a bad name for itself because there were some people out there who very badly mismanaged it. There’s no safety net for accumulation CDC, but if CDC is going to be the solution for the future, there probably does need to be some sort of government backing behind it in certain events.”
CDC simplicity?
Dunn said: “CDC solves a lot of problems because you don’t need to explain to members what’s going on. It just happens. You just vary their income. I think that making that choice is one of the biggest challenges the industry is going to face. But I do think it’s the right thing to do post retirement. CDC is so far off, so let’s forget about it for the time being. We need a solution now,” said Dunn.
Delegates were asked whether something like the Aviva retirement pathway model matched many of the pluses of a decumulation CDC while beating it on simplicity of understanding for members.
Calveley said: “From a member point of view the three pots model is simpler to understand than decumulation CDC.”
Douglas said: “There’s more decisions to make in our three parts model. Yeah, you have to think about it a bit more. But I do think that, you know, you started with flexibility. It does give you more flexibility. CDC gives you what it gives you. This at least allows you to decide how you’re going to spend your money. But it’s over a 15-year period. So it has you know, it has boundaries. What you really miss in CDC is the flexibility and how valuable that is to anyone, I think is the question.”
State pension deferral
Barnett Waddingham partner Mark Futcher suggested an effective way to achieve a similar level of security around end of life risk to that achieved by Aviva’s guided retirement model would be to defer state pension and live off drawdown in the meantime. State pension increases by 10.4 per cent for every year it is deferred.
Futcher said: “If you defer state pension it revalues quite nicely. And one thing that I think is underused, I haven’t really had anyone tell me why is why wouldn’t you as an individual say, I’m going to cover my risk with my DC from 65 to 80? I’ve got 15 years that I need to cover from my pension. I’m going to defer my state pension for 15 years, let that kick in a much, much higher level. And you cover all your tail end risk there.”
But Futcher accepted that such a strategy relies on trusting the government not to tinker with state pension in the coming decades. And while savers might think their chance of recouping each lost year’s income through higher long-term payments were positive for years sacrificed in their sixties, that likelihood shrinks as individuals get older.
Dash for dashboards
Debate moved to the impact of the dashboard project on decumulation journey. Douglas, who is also chair of the Pensions and Lifetime Savings Association (PLSA), said she did not anticipate any movement in next year’s deadline for provider connectivity. She did however suggest there could be some delay in the launch of the dashboard to the public. But she predicted it would see the light of day at some point within 2024.
Advisers suggested some commercially driven new market entrants would seek to gather large amounts of assets. Futcher said we could see a tightening of transfer rules to block transfers where there was
a risk of poor outcomes.
Dunn said: “We’re seeing a very similar sort of thing now where there’s incentives being given to transfer into a provider. A lot of providers have already said, well that’s a red flag according to the new FCA rules. So some of them have said they will move them to an amber flag. That still means in many cases that members are required to have a PensionWise or a Moneyhelper meeting. People in trust-based schemes are well protected from these new transfer rules. But if you’re not, then there’s more risk, depending on which provider you’re transferring from. The vast majority go to these consolidators in terms of transfers out from any trust-based scheme. So it really is already a tidal wave.”
Douglas added: “What we see is a lot of members exit at retirement and I think that’s because we haven’t had good at-retirement products. That’s more the AJ Bell, St James’s Place type of provider. During accumulation it is more of the consolidators, but those are much smaller pot sizes. I am hopeful that having the kind of product that we’ve been talking about today would make it more attractive for people with those middle pot sizes to stay in their workplace pension. But certainly the fees are going to be lower than they are in the retail world.”
Workplace v retail
Delegates discussed the dynamics of the market and the challenges to workplace pension schemes. Futcher said: “Rather than trust versus contract, it’s workplace versus non workplace that is the big distinction. If it’s a workplace scheme, it’s being actively governed by someone and corporates do care about their members. There was a useful clarification that caught a lot of us off guard, from the FCA, saying that trust-based schemes are now going to be classed as retail clients under FCA authorisation. We’re still waiting to hear what that means. In reality, that could be very problematic for a number of companies, particularly around communications. Trustees have enjoyed rather more freedom in what they are able to communicate.”
Risk and opportunity
Mouland said the trend to digital was a double-edged sword. He said: “There’s definitely a risk with digitisation and the ability to be able to see everything and make the wrong decision. But actually there’s also opportunity, seeing the charges and being able to go for those lower cost products. There’s a lot of dog products, stuff that people had 20 years ago that charges 1.5 per cent that they should be out of. If they don’t have guarantees or anything like that, then consolidation can be a great thing.”
Futcher added: “We did some analysis that with a 35 basis points charge as opposed to a 1.7 per cent charge, the difference in expected charge is equivalent to two years’ worth of income in drawdown so if it stacks up to be a lot.”
Porous in retirement
So do advisers see a concern if providers that score well in accumulation are porous in terms of losing retirees to consolidators with high charges and poor functionality over time?
Futcher said: “The short answer is yes. The accumulation space is quite an immature market. But my clients want to get under the skin of this and they want to know they have fully integrated access to things like drawdown supported by guidance. And I think the dashboard will accelerate that.”
