“Will you have enough money to support yourself when you finish in the world of work?”
Sounds like a straightforward question but there is no simple answer. It all depends.
In the UK, two key legislative changes have significantly impacted pension saving and retirement income – (1) auto-enrolment into compulsory workplace pension schemes and (2) Pension Freedoms. To implement at least a basic level of pension provision across the bulk of workplaces, the Government harnessed the power of inertia through inclusion by default. Pension Freedoms, however, brought far more options for retirees but with added-complexity and new risks of financial self-harm.
Having concluded that financial education was too slow and patchy to get employees into pensions, consumers may be ill-prepared to manage their own decumulation phase. Since Pension Freedoms, £25.6 billion has been flexibly withdrawn from pension pots since the reforms were introduced in April 2015, but £3 billion has ended up in low-yielding cash accounts. The Financial Conduct Authority sees the need to act, recognising that the take-up of State provided generic guidance (Pension Wise) has been limited; pre-retirement communications have been too weak, and pension scams have increased. With only 6 percent of the public using professional financial advice, many consumers are making poor financial decisions.
There is well-established evidence that many consumers are unaware of their retirement benefits and what they are worth. They are also ill-equipped to shop around for the best retirement income solutions as a result. The dividing line between advice and guidance is unclear to consumers and whilst guidance may suffice for many retirees, there is an ongoing need for support which is currently unavailable. In addition, some 5 million people are now self-employed and fall outside of the scope of auto-enrolment.
Providers moved away from regulated advice and guidance as compliance costs and legacy issues made these services uneconomic. Very few tools are available to support retirement decisions, even for self-directed consumers. Inertia is a powerful tool to auto-enrol and keep scheme members, but poor financial capability leaves consumers vulnerable and uninformed.
So, what can be done to improve retirement outcomes? Can holistic retirement services engage with consumers, or do we just need a set of reliable default options?
Consultation is now taking place on establishing Retirement Pathways, supporting consumers according to how and when they intend to take an income. Others are sceptical that guidance will suffice and have suggested new product developments such as Collective Defined Contribution (CDC) plans. As already used in several other countries including Canada, Holland, and Norway.
Neither Retirement Pathways nor CDCs provide complete answers to the current retirement outcome issues. For example, if a consumer has several pension pots, is there a Retirement Pathway for each one? Who will provide the holistic view across pension plans and what about non-pension assets? CDCs have advantages but do not help current pension savers and retirees, nor those outside employer schemes. Might Government allow private pension savings to buy additional State benefits, or might savings go towards guaranteeing later life care – not just an income?
Some employers meanwhile have proactively taken up wellbeing programmes covering physical and mental health and wealth to better manage human capital. Sponsors and providers have improved the measurement of the effectiveness of these programmes which increasingly use digital tools and online resources. Some are using Artificial Intelligence (AI) driven nudges to affect attitudes and behaviours, yet views on the cost-effectiveness of these initiatives is mixed. The programmes are also only available to employees of large organisations, so fail to provide a market-wide or lifetime solution in any event.
Government has sought to augment private sector wellbeing programmes with initiatives such as The Department of Work and Pensions-backed “Midlife MOT” – a cross between pensions, health, and career planning. Whilst early results have been encouraging, the benefits of these interventions will take time to assess and to impact cohorts of retirees.
There is consensus on the need to mitigate some of the unintended consequences of Pensions Freedom, but the current pipeline of answers seems to be partial in terms of scope, impact, and immediate effect. If the drift is towards prescription in decumulation, consumers will still need guidance on their finances as a whole and their personal circumstances. As a result, pension providers and technology players are developing new ideas to solve retirement outcome issues and to better engage passive consumers.
In the second part of this blog series, we will consider the tools and techniques that might complement strategic product solutions.
Vaughan has worked in senior roles in pension providers and consulting firms, often with a focus on the changing international retirement markets. Clients have included financial regulators, guidance bodies and technology firms as well as financial institutions. He is a member of the UK’s Financial Capability Strategy Advisory Board and he has published a number of articles on fintech, workplace marketing, and data privacy.