Has the industry kept its promise on at-retirement innovation?

The “reassurances” offered to policymakers were such that the DWP expressed “hope that development of new products will progress at pace now that the freedom and choice reforms are well established”.

One year on, and some politicians are questioning whether the collection of competing mastertrusts and insurers have earned their respite from what they had labelled market distortion.

Default retirement pathways are an inevitability, we know that we will have a large number of members in that category

Nico Aspinall, The People's Pension

In March, the Work and Pensions Committee, led by veteran MP Frank Field, called for Nest’s entry into “a market devoid of switching, innovation and other indicators of competitive pressure”. The same report called for drawdown providers to develop default pathways.

Insurers still believe in advice

What is undoubtedly true is that none of Nest’s peers have developed a packaged default product akin to its own retirement blueprint, which would allow savers a combination of cash, income drawdown, and insurance against longevity bought gradually with payments from the drawdown fund.

But in fairness to the industry, many providers, particularly in the contract-based sector, do not believe that this is an appropriate direction for product development to travel in.

“Everyone’s needs in later life are different – there is no ‘one-size-fits-all’ for retirement plans. In addition, as people make different lifestyle choices over the years, their retirement plans will undoubtedly change,” said Peter Glancy, head of policy development, corporate pensions, at Scottish Widows.

He added: “We therefore believe it’s important to continue focusing on engagement even when a customer starts drawing down their pension to make sure it still meets their needs.”

Guided by these principles, innovation has instead focused on giving individuals and their advisers the tools to create bespoke solutions.

Scottish Widows’ drip-feed drawdown product, for example, allows savers to combine regular income and tax-free cash to manage their tax position, which is particularly useful for those taking a more phased approach to retirement. However, the product is only available to advised clients.

Provider Aegon, meanwhile, has focused on educating and engaging its savers as well as possible. Having withdrawn a “drawdown with guarantees” product due to lack of demand, it instead decided to cut down its lengthy wake-up packs and offer planning tools to clients.

“Where innovation has been visible is in how providers have communicated the pension freedoms to their customers,” said Steven Cameron, pensions director at Aegon.

GPPs offer a default of sorts

These efforts mean that, ironically, those drawdown providers ordered to implement defaults by Field are actually those that provide most support to savers and offer a simple step into a drawdown product, said Maria Nazarova-Doyle, head of DC investment consulting at JLT Employee Benefits.

By contrast, the UK’s single-employer defined contribution trusts offer members one option, she said: “You can take your cash and go somewhere else.”

Nazarova-Doyle also said more thought needs to be given to how a default solution would actually work.

“Are we just going to push income onto people without them making a choice?” she asked. “Maybe they don’t access their savings or don’t make a decision for a reason.”

UK is lagging US

For some experts however, improvements to communications do not constitute true innovation, especially when compared with products tackling that great unknown for savers – longevity.

Mark Futcher, head of workplace wealth at consultancy Barnett Waddingham, praised American conglomerate United Technologies’ development of a lifetime income strategy, but added: “We haven’t really seen any innovation from the UK.”

Solutions involving the purchase of guaranteed income for a later date have been criticised for their cost, and a deferred annuity market is practically non-existent in this country.

But Futcher pointed out that buying tranches of income does have a pound-cost averaging effect: “If you’re gradually buying a deferred annuity over many years you’re not as beholden to swings in prices.”

Mastertrusts a good fit for hybrid products

Default hybrid solutions involving drawdown and guarantees are likely to best fit those lower earning individuals who have a significant pot but for whom advice is too expensive.

As such, they have found more favour in the mastertrust sector. However, while most large mastertrusts now offer drawdown, few have offered more sophisticated services.

“Default retirement pathways are an inevitability,” said Nico Aspinall, chief investment officer at B&CE, the provider of mastertrust The People’s Pension. “We know that we will have a large number of members in that category.”

With auto-enrolment still in its infancy, however, this cohort is yet to materialise to the extent that such products become commercially viable.

Aspinall said he would rather the government money needed to fund Nest’s proposition was diverted to the state pension instead: “I’d query for Nest in particular how long it would take them to build up the economic case.”

Economics should not trump consumer needs, and now is the time for thinking about how to cater for future retirees, according to Futcher. Poor prior planning “is what has got us into this mess in the first place”, he said.