Some of the best minds in the pensions industry have spent the past 10 months trying to redesign defined contribution scheme investment. But some of that thinking is based on a faulty premise.
The ‘future of DC’ products that have recently hit the market try to cater for the split retirement wishes of today’s workplace pension savers, focusing on the three expected routes of travel: cashing out, annuity and drawdown.
On paper, this makes a lot of sense. Why shoehorn scheme members into a particular option if it is not right for their individual circumstances? Surely we can do the best for each according to that person’s means and desires?
But the more canny among you have spotted that this would require a sophisticated and sustained communication approach in the run-up to that decision being made.
Going beyond that, do people know at 40 or 45 years of age what they are going to need at age 55? Never mind that this process is utterly reliant on an engaged audience.
Illustration by Ben Jennings
In his latest report for free-market think-tank the Centre for Policy Studies, Michael Johnson has called for ‘auto-protection’ to remove the downside risk of George Osborne’s retirement reforms.
“There are legitimate concerns that some people may fail to purchase suitable retirement income products,” Johnson argues. Agreed.
His answer: defaulting people at their retirement age into a national auction house for annuities. If this sounds familiar, it is because Johnson has been calling for it for a few years now.
Some of Johnson's proposals will as ever raise eyebrows – such as jettisoning the 25 per cent tax-free lump sum, which in his view discourages security. But they are worth a read.
Helpfully, they come from the other end of the spectrum from the current DC optimists. Johnson thinks people will make bad decisions too late. DC default designers think people will make good decisions early enough.
The cliché says the truth is somewhere in the middle. But it could be anywhere on that spectrum.
Ian Smith is editor of Pensions Expert. You can follow him on Twitter @iankmsmith and the team @pensions_expert.
