The Australian experience of defined contribution indicates UK pensioners could deplete their retirement pots too early, a report warns, but experts say what we can learn from overseas systems is limited.
The introduction of pension freedom earlier this month allows DC members greater flexibility around how they access their pensions in retirement, but some have warned that retirees risk exhausting their savings prematurely.
The Pensions Policy Institute report, entitled 'How might the UK pensions landscape evolve to support more flexible retirements?' examined policy and behaviour in the US, Ireland, New Zealand and Australia to predict member decisions and risks for the UK.
The report said: “By introducing more choice and flexibility into how individuals use their DC pensions to support themselves in retirement, the reforms have also introduced risks of resources being expended too quickly or too slowly.”
A quarter of Australians aged 55 deplete their savings by the age of 70 and high levels of personal debt in the UK may mean high numbers of DC savers will use their lump sums to pay off outstanding balances.
The fact there has been annuitisation already here might make it more likely to continue here… The whole economic situation is different and there are different cultural norms
Melissa Echalier, PPI
Melissa Echalier, senior policy researcher for the PPI, said the previous UK culture of annuitisation may inform member behaviour in the future and reduce the risk of people spending their pots.
She said: “The fact there has been annuitisation already here might make it more likely to continue here… The whole economic situation is different and there are different cultural norms. There’s a limit to what [examples from other countries] might tell us.”
Longevity risk
However, some said the questions faced by pension schemes were universal.
Sophia Singleton, head of DC consulting at consultancy Aon Hewitt, said recent discussions with members of overseas pensions industries showed uniformity in the issues faced.
“It’s the same issues we’re talking to clients about. Adequacy is the key issue everywhere,” she said.
Singleton added that though many other countries had a system predicated on freedom and choice for longer, the lessons for the UK system would be limited.
“They haven’t totally worked it out,” she said. “Lots of the innovation will be driven from within the UK.”
Others were more pessimistic about what the paper's findings indicated.
Steve Groves, chief executive of annuity provider Partnership, said: “We must not forget the original purpose of pensions - to provide a secure income in retirement for people as long as they live,” adding the difficulty of calculating individual longevity could be mitigated by longevity insurance, which uses data from thousands of people to make predictions.
Groves said: “Australia and the USA have shown the problems in the system we are introducing, do we really need a generation of pensioners to suffer the same outcomes before we are brave enough to adjust the sails on this particular policy?”
But Ros Altmann, older worker’s champion for the government, said: “The idea of our pensions system going forward is that the longevity insurance is provided by the state pension and your private pension is really your own savings for you to decide what’s best to do with at the time.”
She added protecting against longevity risk was sensible, but was just one of many risks retirees should be mindful of.
