Legislative and policy assumptions about member behaviour as they approach retirement are completely out of sync with reality, and now is the time to “rethink all of it” before dashboards are introduced, according to Philip Brown, group director of policy and external affairs at B&CE, provider of The People’s Pension.
Speaking at the Pensions and Lifetime Savings Association’s annual conference on October 13, Brown explained that much retirement policy operates on a number of flawed assumptions.
Particularly post-pension freedoms, it has been assumed that members approaching retirement would be inclined — or able — to rationally plan, accurately assess risks, desire an income for life, equip themselves with the right tools, shop around for the best product, look to maximise investment returns, and get ongoing advice on all of the above, he said.
By contrast, research from B&CE, ongoing over seven years, suggested that members are generally scared of planning, underestimate longevity risk and fail to grasp inflation risk; they are reluctant to think about later years; they recognise their own limitations and want providers to give them solutions; and they tend to “follow the path of least resistance” rather than switching to better products.
How should we deal with members? Should we send statements? Should we point them to dashboards? Let’s rethink all of it — because now is the time to do that before the dashboard is actually in existence
Philip Brown, B&CE
Additionally, the research suggested that members do not always wish to have an ongoing relationship with advisers, and often have interests — like responsible investing — beyond merely maximising investment returns.
“Overwhelmed is a word that comes out regularly when you speak to members. And if you think about the way people approach retirement, especially if they’re in the auto-enrolment sphere, we’ve held their hands,” Brown argued.
“We’ve put them in a pension that was done through their employer. And then they approach retirement and suddenly they’ve got a huge decision to make, and [we assumed] they’ll be super engaged with how to make that decision.
"They’ll be part doctor, part financial adviser, part economist; and they’ll have to imagine how their life is going to change over a 30-year period to make a really, truly informed decision,” he continued.
“Clearly, nobody actually has that group of skills to make that decision.”
Dashboards prompt a ‘rethink’
The impending introduction of pensions dashboards provides an opportunity to “rethink all of it,” Brown continued.
“Through pension freedoms, [members] inadvertently picked up the message that you can treat pensions like bank accounts,” he argued, while the introduction of dashboards is an excuse to “start with a blank piece of paper” as far as member engagement and education is concerned.
“How should we deal with members? Should we send statements? Should we point them to dashboards? Let’s rethink all of it — because now is the time to do that before the dashboard is actually in existence.”
Rolling back pension freedoms?
Some 86 per cent of respondents to a poll at the same session said defined contribution schemes should offer a “seamless income option” as the default, with subsequent discussion about how best to achieve that.
Jo Gibson, deputy director of automatic enrolment and DC at the Department for Work and Pensions, acknowledged that some of the suggestions appeared to be “the opposite of pension freedoms”, so the government would have to “think about how that fits in policy terms”.
The DWP recently ran a call for evidence on mass market decumulation, and although Gibson was not in a position to give the government’s final answer — it is still considering the responses — she did provide an update on the general themes emerging from it.
“Firstly, information — and this is really difficult. People want stuff that’s simple. They want it personalised, they want it tailored. They don't want more. They’ve got plenty, but they want it better. They want it clearer, easier to understand,” she explained.
“And then on products and services, it was really clear from the feedback that the the level of support and information that’s out there for people varies from scheme to scheme, from product to product — and it’s overwhelming. People don’t understand it. They don’t really know what’s going on.”
While many respondents said they wanted a retirement income, she cautioned that there is no universal retirement profile, and others preferred to have more flexibility — which poses difficulties in setting a policy, since it “must provide for both in a world of choice”.
Small pots problem is ‘only going to get worse’
The number of small pension pots — and the costs of administering them — will continue to increase, despite efforts from the government and industry, a Pensions and Lifetime Savings Association panel has warned.
The call for evidence additionally saw considerable support for collective defined contribution models, and Gibson reiterated that the DWP is looking at expanding CDC to multi-employer models, leaving open the question of whether “decumulation-only models are going to work as well”.
“I think the bottom line was around, what do people want? What choices do they want, at what stage in their life, and at what stage in their retirement?”
Finally, Gibson intimated that government upheaval may have an impact on the DWP’s response time, as it would be necessary to first get the new minister for pensions and growth, Alex Burghart, up to speed on the issues.
