After an illuminating day at the Pensions Expert DC Strategic Summit last week, editor Nick Reeve opines on the decumulation dilemma.
Decumulation, or turning a defined contribution (DC) savings pot into a sustainable retirement income, is “the nastiest, hardest problem in finance”, according to the economist William Sharpe.
At Pensions Expert’s DC Strategic Summit in London last week, I hosted a panel discussion where we attempted to solve that nastiest, hardest of all financial problems.
With the aid of Janette Weir from Ignition House, Jonathan Cribb of the Institute for Fiscal Studies, Nest’s Paul Todd, and Ruffer’s James Fouracre, we grappled valiantly with different aspects of what members want from a pension and what they are likely to get, now and in the future.
Research has shown that, while people typically don’t want annuities, they do want a secure income that won’t run out. They also want flexibility and the ability to pass money on to family members.
I don’t think my expert panellists will mind me saying that we didn’t quite manage a solution, but we did at least face head on the myriad issues facing people at retirement.
Research has shown that, while people typically don’t want annuities, they do want a secure income that won’t run out. They also want flexibility and the ability to pass money on to family members.
The problem with this is that it’s not particularly commercially viable to combine all these qualities in one product. If it was, surely such offerings would have emerged in the decade since pension freedoms?
Combining multiple income streams is an option for some (but not all), but accessing support and advice to do this effectively is often not an option.
There are so many other moving parts to the decumulation dilemma. How do we factor in healthcare costs? How are we addressing the need for consolidation of small pension pots? Are pension providers able to take into account other savings streams that people can use? And what about those who will be renting in retirement?
Innovation is coming to the decumulation space, in part through force as the government will require DC schemes to offer a default retirement pathway. But no single solution is going to suit every scheme member.
Savers will continue to need robust support as they transition from working life to retirement, and the Advice-Guidance Boundary Review will be critical to helping pension providers help their customers, as one delegate remarked at this week’s summit.
I’m starting to think that “the nastiest, hardest problem in finance” might be an understatement.
Nick Reeve is editor of Pensions Expert.
