The UK’s state-backed pension scheme has led calls for understanding member behaviour in light of the incoming pension flexibilities, arguing such work is more important than developing new products for savers.
The mastertrust, which has 1.7m members and growing, began a consultation this week on the effect of this year’s Budget changes in which it highlighted member understanding and behaviour as key sticking points.
The consultation document states: “The problem for members when planning for retirement is not bad heuristics, but the lack of any frame of reference when making retirement planning decisions. Members lack relevant experience and the confidence to make decisions.”
This leads to challenges for providers attempting to develop products to capitalise on flexibility, the organisation argues, as members ask for impossibly ambitious products, or say one thing and do another.
Paul Todd, assistant director of investment at Nest, said: “Some internal research we did asked people what kind of things they want. People wanted inflation-linked secure income for life that couldn’t be affected by the marked, which is an inflation-linked annuity that not many people buy.”
Andy Cheseldine, partner at consultancy LCP, said: “It’s something that has to come from wider education from the government and everyone [in the industry]. Ask members what they want and you’ll get silly answers, because they want everything.”
Cheseldine said many of the consumer demands were already covered by products in the market, such as annuities for those who want guaranteed income and drawdown for maximising potential income.
He said: “If I came across someone who wanted everything I’d just split their pot. These are desires that are incompatible.”
Cheseldine agreed that people wanted security in retirement, adding: "Maybe if you called annuities guaranteed income products they might do better. Most people want annuity products in terms of structure, but with a higher return.”
One answer that has been proposed in the industry is to design multiple default funds based on member profiles and targeting different outcomes. Todd said the danger with this approach is “it’s a difficult decision to make if you don’t have complete information”.
Daniel Smith, director of business development for DC and workplace saving at provider Fidelity, said the spread of choices made at retirement was becoming more even since the Budget announcement.
“We’re finding people are reaching their retirement date and not doing anything for two or three years… the key thing is that [in] consumer behaviour spread and a lot less reliance on annuity… We think people will stay invested in their plan and dip into it periodically.”
The consultation document also examines collective defined contribution as a means of sharing risk between members, which sparked immediate interest within the pensions industry.
But Todd said any foray into CDC by the mastertrust was a long way off, at best. “Of all the documents, that’s the least well-developed. Our focus is still very much on how we can get good solutions in a DC framework.”
However, Cheseldine said Nest would make a good candidate to provide novel approaches to CDC to increase retirement security. “I could see an argument for transferring a third of my pot at retirement into a Nest CDC under the agreement that I don’t remove it until 85," he said.
"It’s a bit like a deferred annuity, but it’s a deferred CDC withdrawal fund.”
