Guided retirement solutions could become a crucial new layer of support for savers but schemes will need better data, segmentation and communications to make them work, according to a new report from the Pensions Policy Institute (PPI).
The PPI’s report found that guided retirement frameworks – which are a requirement on all defined contribution providers contained in the Pension Schemes Act – will need to operate using partial information, with members grouped into broad, data-informed categories based on characteristics that schemes can reasonably observe or infer.
“Competing objectives such as income security, flexibility, and simplicity present clear challenges for default solutions to meet a diverse range of member needs.”
Mariana García Requejo, Pensions Policy Institute
The report said segmentation would need to sit at the centre of solution design, with schemes and providers balancing the use of available data against the need to keep options simple enough for members to understand and use.
Mariana García Requejo, senior policy researcher at the PPI and lead author of the report, said: “Guided retirement has the potential to play a critical role in improving how individuals navigate retirement income decisions, but many questions lie ahead over its design and implementation.
“Competing objectives such as income security, flexibility, and simplicity present clear challenges for default solutions to meet a diverse range of member needs.”
The report comes as the pensions industry considers how guided retirement should operate under the Pension Schemes Act, which places greater emphasis on the provision of a regular income in retirement.
However, the PPI said the legislation does not specify how far solutions should seek to mitigate risks such as longevity, inflation or investment volatility, or the degree to which schemes and providers should guide member choice.
The report warned that income security, flexibility, simplicity and the ability to respond to changing circumstances cannot all be maximised at the same time. As a result, different guided retirement designs are likely to reflect different priorities across memberships.
One-off decisions ‘unlikely to be enough’
The PPI said guided retirement may need to work as an ongoing, dynamic pathway, rather than a one-off decision when members first access their savings.
This would have implications for when the pathway begins, how it changes over time, and how members are supported to revisit decisions after market shocks, changes in health, changes in household circumstances or shifts in spending needs.
“We urge schemes to start preparing now by getting to know their members, improving their data and considering how they will design and implement defaults that truly deliver better outcomes for members.”
Joey Patel, the Pensions Regulator
Communication will be central to the effectiveness of guided retirement, alongside existing and emerging forms of support such as Pension Wise, targeted support and regulated financial advice.
Joey Patel, director of policy and pensions reform at the Pensions Regulator, said: “Members need more help to turn a savings pot into a sustainable retirement income and default pension benefit solutions have the potential to make a real difference.
“We urge schemes to start preparing now by getting to know their members, improving their data and considering how they will design and implement defaults that truly deliver better outcomes for members.”
Jamie Jenkins, director of policy at Royal London, added that retirement choices could affect members’ living standards for decades.
“In an ideal world, professional financial advice would be available to everyone, but this simply isn’t the reality for most people reaching retirement today,” he said.
“The alternative idea of guiding people through their retirement choices therefore becomes crucial, and the Pensions Policy Institute’s report provides a rich source of analysis and represents an important contribution to the debate.”
Jonathan Watts-Lay, director at Wealth at Work, warned that a generic default pathway could leave some savers in unsuitable arrangements, particularly where they hold several pension pots.
He said personal guidance, digital tools and workplace retirement support are likely to become best practice as guided retirement solutions are introduced.
