Three-quarters or 75 per cent of DC pension savers aged 55 or over want their DC savings to start paying them an income automatically when they retire, according to research from Hymans Robertson.
The research titled, “Designing Decumulation Defaults – Remember the Member” sheds light on the pressing need for member-centric default decumulation design. The paper argues that such an approach could serve as a crucial safety net for members who may not actively engage in making their retirement income choices.
The research emphasises the need to address these issues immediately, highlighting the risks of bad outcomes resulting from missed opportunities, expensive blunders, and general uncertainty among members.
One of the research’s main conclusions is that savers give top importance to features like employer review protections, opt-out clauses, and timing considerations that coincide with the State Pension Age or earlier.
The paper provides a thorough set of guidelines that providers should take into account when creating retirement income plans. These guidelines include putting member needs and strategic objectives first, recognising and reducing risks, and making sure that member behaviour after retirement is in line.
It also provides solution designers with a set of concrete actions to take, such as using data in an open and transparent manner, comprehending member preferences, establishing explicit design goals, and carrying out thorough risk assessments and member testing.
Hymans Robertson head of DC at-retirement services Kathryn Fleming says: “The need for DC pension pots to deliver a sustainable income in retirement is ultimately the exam question the industry is trying to answer. There’s an ambition to get as many people as possible to engage with their retirement savings, but there will always be a significant number of people who won’t engage. It’s therefore essential that there’s a safety net in place for these individuals to give them the best chance of having good retirement outcomes.
“Members’ income sources for retirement are likely to be determined by more than just their DC savings, but it will be challenging to collate a picture of this across a scheme membership. It is also notable that as DC wealth increases, so too does the likelihood of an individual taking financial advice. In addition, there is significant evidence that small pots are simply cashed in. Any design is therefore likely to need flexibility to suit different segments of members.
“Pension schemes will also be starting from different positions, with different regulatory requirements and different membership profiles. The decision-makers will also have different risk appetites, strategic objectives, commercial synergies, so differing solutions will evolve.
“As with most things in pensions, there’s not a perfect answer. But there are a number of options that are already available or are being explored by the industry that may feature in default decumulation solutions. These include annuity, income drawdown, and CDC, as well as longevity pooling and blended solutions.
“We would encourage providers to really seek to understand their average member’s needs now and in the future. People are complex and the data being relied upon to build a picture of an average member is incomplete. What members want or need from their DC retirement savings is exceptionally personal and varied, therefore the approach taken to designing something for an average member is going to require a lot of careful consideration. Finally, these solutions cannot be set and forget. In the absence of any upfront decision from a member, there needs to be consideration given to delayed engagement.”