Accumulating a pension pot and choosing how to draw it down should not be treated as two distinctly separate issues, according to Cushon policy and research director Steve Watson.
The interim report from the Pensions Commission is a welcome and important moment for the pensions industry. Much of the debate around pensions adequacy has traditionally focused on accumulation: how much people save, whether contribution levels are sufficient, and how to get more people saving into workplace pensions.
What is particularly encouraging about the commission’s interim report is its recognition that the question of adequacy does not end when someone reaches retirement. The report includes a substantial focus on decumulation, acknowledging that the challenge of ensuring people have enough income in later life is inseparable from the challenge of helping them build sufficient savings during their working years.
Accumulation and decumulation shouldn’t be treated as separate policy questions. They are two sides of the same coin. Pension adequacy is about paying enough in and getting enough out. Any meaningful discussion about customer outcomes must consider both.
The challenge is that when it comes to decumulation, the industry has relatively few tools in its toolbox. But the defined contribution (DC) pensions sector is still relatively youthful, and I remain hopeful that the pace of innovation will increase.
Retirement: a crucial juncture
While significant attention has been devoted to helping people save, far less has been invested in helping them convert those savings into sustainable retirement incomes, which is the key challenge set by guided retirement.
This matters because the decisions people make at retirement can be just as consequential as the decisions they make while saving. And that brings us to perhaps the most important issue of all: customer engagement.
Most people do not actively select their pension investment funds, but well-designed defaults have helped millions to successfully build retirement savings. However, default decumulation raises a different set of challenges.
Retirement income decisions are more personal, more visible, and often more consequential. While many people will engage actively with these decisions, experience tells us that many will not, which is also recognised by the Pensions Commission. That reality should not be ignored or criticised; it should be recognised and accommodated within policy design.
Communicate, communicate, communicate
In my view, the answer is not to abandon engagement efforts – instead, we must double down. We should start them much earlier and dial them up. We must never give up on informing, educating, and ultimately getting people to take ownership of their financial future, as we know this leads to better retirement outcomes. But we must also make sure that there is an adequate default position for those who don’t engage.
Too often, decumulation enters the conversation only when retirement is approaching. By then, many savers are feeling overwhelmed by unfamiliar concepts, complex choices and industry jargon. Yet this is precisely the moment they are being asked to make significant financial decisions or, looking forward, being told that they are being placed into a particular default strategy.
We need to surface these issues years earlier. We need clearer language, simpler explanations, and more consistent communication about the choices people are likely to face.
“The conversation about how much people save must be linked directly to the conversation about how those savings are converted into retirement income.”
Steve Watson, Cushon
Most importantly, we need to help people understand not just what options exist, but why those options matter.
Of course, we must accept that engagement will never be universal. But there is a significant difference between inertia and informed acceptance.
A good retirement system should ensure that people at least understand the pathway they have been defaulted into.
Ultimately, adequacy depends on a partnership between individuals, industry and government. The government can establish minimum contribution levels and create the framework for good outcomes. Providers can innovate and design products that better meet retirees’ needs. But long-term success also requires pension savers to be equipped and empowered to make decisions where appropriate.
The Pensions Commission’s interim report is significant because it recognises that the adequacy challenge spans the entire pensions journey. Accumulation and decumulation cannot be considered in isolation. The conversation about how much people save must be linked directly to the conversation about how those savings are converted into retirement income.
And while defaults will play an essential role, we must never give up on empowering people to understand their pensions and engage with their financial futures.
That is how we build a pension system that not only helps people save enough but also helps them get enough from those savings when it matters most.
Steve Watson is director of policy and research at Cushon.
