From the blog: The new pension flexibility has now been available for one month. Early indications suggest a great deal of interest among pension savers, but it is too early to identify trends in terms of what people will do with their pension savings.
The risks associated with these reforms are well rehearsed. But the question remains: how do we help people make good choices and achieve a good outcome from their retirement savings?
I think a three-pronged approach is required.
The risks associated with these reforms are well rehearsed. But the question remains: how do we help people make good choices and achieve a good outcome from their retirement savings?
I think a three-pronged approach is required.
Educate...
Giving people freedom is one thing, equipping them to make the most of it is another. To help savers make good choices, financial education needs to become commonplace.
Employers have a key role to play in providing this because most people trust their employer far more than financial institutions.
The idea that members who want to enter drawdown are forced to leave a low-cost, trust-based environment and select a suitable drawdown vehicle from the retail market, which may be subject to much higher charges, makes me nervous
It is also in employers’ interests to do this. One consequence of the new flexibilities is individuals can get their hands on their entire pension pot from age 55.
This means they can spend their retirement savings before they even retire. This could create a major HR headache for employers.
To help avoid this, companies should consider the merits of providing financial education to their staff.
To be effective this needs to start early, be tailored for different age groups and look at all aspects of financial wellbeing, not just pensions.
Guide...
There is a reason why you only get a choice of three different sizes when you go to buy a coffee: because most people struggle with too much choice.
To help people navigate the range of different retirement income products that will be available to them, trustees and providers need to keep things simple.
Schemes should also be brave enough to help guide savers to an appropriate option by asking a series of questions, such as:
Do you want to ensure you will not run out of money before you die?
Do you need some cash now?
Do you want to leave an income for your spouse or partner should you die first?
Do you want to continue to benefit from investment return on your savings?
Default...
Trustees and providers also need to be smart about how they use defaults to help achieve good outcomes for their members.
One area, in my view, where a default is needed is where schemes do not offer a drawdown facility to their members, as is currently the case with many occupational pension schemes.
The idea that members who want to enter drawdown are forced to leave a low-cost, trust-based environment and select a suitable drawdown vehicle from the retail market, which may be subject to much higher charges, makes me nervous, and I suspect steps will be taken to address this by regulators or policymakers.
A better option would be for trustees in this position to select a default pension provider or mastertrust to which the savings of members who want to enter drawdown are automatically transferred unless they make an alternative choice.
This would ensure the members’ savings remain in a good quality, low-cost vehicle and they benefit from the same level of protection in the decumulation phase as they did in the accumulation phase.
Tim Smith is a senior associate at Eversheds
