DC pension schemes are paying increasing attention to how they help members make better retirement decisions and adopt better strategies urged on by regulators, with more legislation currently being debated.
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Yet as one panellist at the Corporate Adviser round table ‘DC pensions: towards better retirement outcomes’ noted,
while accumulation strategies are broadly similar, members’ approaches, needs, attitudes and choices are often radically different in the run-up to and across years of retirement.
The good news is that the sector is much more engaged in the decumulation conundrum than it was even two or three years ago, but it is still to converge on what might be agreed solutions.
Data demand
L&G strategic relationships director Alex Snowball emphasised how the firm is gathering more data. This includes information about members’ other DC and wider savings wealth, helping it to develop better retirement propositions. This is also helping to inform consultations with regulators, as they grapple with achieving better retirement outcomes.
One of the challenges with addressing today’s retirement landscape is the breakdown in long-established retirement patterns.
Personal patterns
Hymans Robertson DC associate consultant Michael Ardill said: “We’ve seen the market recognising that moving into very low risk strategies and targeting a single retirement date is not necessarily the best way forward for members.
“Moving into retirement has individual personal patterns but there is also a need to manage some of the longer-term risks that are there, particularly longevity risk and maintaining the real value of the pension pot. We are starting to see an exploration of higher risk strategies moving into the retirement phase.”
He also noted the need to keep an eye on sequencing risk. But he added: “We’ve not seen a consensus on what a retirement strategy looks like until now.”
More choice
WTW director, retirement Anne Jones said that much depends on the demographics of a scheme. But she pointed out that the idea of “middle income” scheme members covered “an awful lot of different types of jobs and types of different knowledge” which in turn might need to be reflected in the level of support required.
“The level of support you get needs to reflect the level of risk and the options that you have in terms of investment. The wider the range of options, the more support
you need.”
Mark Humphreys, trustee director at LawDebenture (LawDeb) added: “It’s a cliché, but everyone accumulates in the same way, but then decumulates in massively different ways. We need the data to support these decisions.”
He also noted just how much of a difference renting or owning could make. He said: “You have wildly different behaviours for retirement, between homeowners and people who rent and the number of people who rent in retirement is going up steadily. The idea that we can have a single default doesn’t work. We’re going to need a range. We’re going to need to help people get to the right place for their particular circumstances and we’re quite a long way from that.”
Benefit type dictates investment approach in part
XPS partner Christopher Barnes stressed the importance of the type of benefit to the investment strategy.
“First there’s the design of that benefit – whether it’s flexible or fixed and within each of those, how is that then structured from the investment point of view? Risky? Not risky? Somewhere in between?”
Market shocks
LCP partner Lydia Fearn noted that ‘risk’ has had a great run recently and as a result members’ returns have been great. More broadly, we are also in the midst of a general policy debate about how to get more people into investing and out of cash.But this approach inevitably holds risk for scheme design.
“If we have a downturn in the market and people are in more risky situations and they feel that they’ve been defaulted into something, that’s when the lessons may well be learnt. We have to be mindful of
that modelling and where those members will end up should something happen.
“Let’s not forget that members retire in very different ways. Often, depending on the sorts of jobs they’ve got, some have to stop and then take income, but some will continue part-time. Having an understanding of what that individual is doing is super important because then you can align a strategy with their circumstances.”
Kelly Parsons, head of DC proposition at Broadstone said: “It’s really important to make sure that you’ve got something for those people that are just apathetic, that just don’t do anything and make no decisions whatsoever.
“They just leave it to somebody else to make the decisions. This is where you need to make sure that the investment strategy is good enough, but also to have the flexibility for those who do want to make decisions and make choices as they get further along. It’s difficult getting that balance right. Age 65 is no longer the age you aim for. It can be all sorts.”
High withdrawals
Neil Kempshall, DC consultant at First Actuarial noted some of the jaw-dropping levels of withdrawals taken
by some members.
He added: “You’re going to need something that caters for someone who really wants to maximise income. Perhaps you should segment an approach which says for those that really want to have high income and are willing to sacrifice capital, there’s something bespoke for them. Something in terms of dynamic asset allocation is pretty important as well, just to make sure that you’re constantly changing and moving as you need to.”
No longer linear
Aon DC consulting partner Gemma Burrows added that the retirement path is no longer linear: “There is no one approach that’s going to meet all the different ways that people might need. For some of these people, they go into retirement, but they’ve still got this pension as a long-term investment. It could be 30, 40 years depending on their health. So, the investment strategy has got to be suitable to cater for that and reflect the fact that you still need to have good growth if you’re going to leave money invested for that period of time.”
But calculations are also shifting as a result of bringing pensions into the scope of IHT.
IHT change means more scenarios
Barnett Waddingham partner and head of DC and workplace wealth, Mark Futcher said: “Bringing pensions into IHT completely changes the mix. The right investment strategy is going to be even more bespoke for members than it was before. Now we’re going to see a lot more cohorts of members retiring and getting sucked into IHT. They need to plan for that. Where do they take those assets from? You know, a pension now isn’t really a pension. It’s another pool of money that you manage tax efficiently from. We just need to have a much, much broader conversation.”
Panellists contrasted the amount of support available from schemes with what clients could get in the higher-charging retail side of the market.
Fearn said: “Why are members taking money into expensive retail plans? Because they’re getting their hands held through the whole process. We’re going to have to put our hands around these individuals through the whole thing. A default is fine, but how can you have a default when you don’t know what’s in someone’s bank account? How do you say we’re going to put you in an annuity. We don’t know anything about you. We don’t know how much money you’re going to have in totality, but we’re going to buy this annuity for you.”
Dilemma around later annuitisation
Panellists grappled with whether facilitating flex-and-fix offered a better solution. Snowball said: “When we’re thinking about solutions – and multiple solutions are needed – we don’t just think flex-and-fix is this moment-in-time based thing. The annuitisation will need to have a level of data brought into the equation. We’re going to have to consume the data. We have to use very clever nudges.
“So we’re bringing behavioural science to ask questions such as ‘have you visited a doctor this year?’ It’s gentle nudging. That’s where I think providers have a really important role to play in making sure members see a full suite and have full access to all the options. So annuity broking, you’ve got to have that right. You can’t just say you are going to hand this off to someone else.”
Futcher added: “People are still going into retirement. They’re going to have two or three pots, two or three providers. One’s a default pathway, one might be CDC, because they’re in that cohort, one a master trust. These members are going to need to understand how to pull all of that together. They’re being defaulted potentially three different ways. That’s not what they should be doing. They should be looking at the pot as a whole and deciding which option. We can’t assume that we’re going to be in a perfect world anytime soon.”
Burrows added: “There are a number of positives to flex-then-fix being a solution. The biggest thing I’m hearing from trustees is a nervousness over putting someone into a situation that’s irreversible. Trustees making those decisions about how to design their own default decumulation may well see flex-then-fix as an opportunity, where you’re at least then giving members a longer period to engage rather than deciding at 65.
“But then you come up with a huge number of complications, like people withdrawing at rates that are unsustainable. How much of the pot are you going to then leave to purchase a guaranteed income?”