Savers can achieve positive outcomes with the range of products already available to them, according to a Pensions Policy Institute report emphasising the importance of engagement in helping people make more informed decisions.
Of people reaching retirement in the next 10 to 15 years, 28 per cent will have moderate to high levels of defined contribution savings and low or no defined benefit entitlement, according to the PPI.
We’ve got income drawdown and we’ve got annuities, and actually the best solution for most people is to blend the two
Nathan Long, Hargreaves Lansdown
The ‘Evolving Retirement Outcomes’ report explores the range of outcomes DC savers can achieve with existing products and the scope for innovation.
It follows its previous report, published in May, which looked at the ways in which the retirement landscape has evolved in recent years, primarily as a result of freedom and choice.
Engage before innovating
In the new report, the thinktank noted that innovation has been limited since the introduction of freedom and choice in April 2015. It put this down to the fact that it takes time for new products to be developed, and a perceived lack of competition in the retirement income market.
But it said that while innovation in terms of new products could be beneficial, it may not be necessary. Instead, existing products could be used more effectively in order to meet the needs of retirees.
Lauren Wilkinson, policy researcher at the PPI, said savers are able to achieve good retirement outcomes with existing products available, “but it’s actually about increasing the engagement and financial capability that those people have, to enable them to make those decisions”.
She said this means “looking less at product innovation, and more at innovations around engagement [and] guided pathways”, for example.
Wilkinson highlighted the importance of getting people more engaged in the run up to retirement.
This is something the Financial Conduct Authority focused on in the final report of its Retirement Outcomes Review last month. In addition to recommending investment pathways for drawdown, the watchdog proposed the provision of single-page ‘wake-up’ packs when members turn 50.
“Obviously, it will take time for that engagement to actually increase… so there do need to be policies in place to help those people make positive decisions,” Wilkinson said.
A combination of remedies
Kate Smith, head of pensions at provider Aegon, said that while pension freedoms are a good thing, they have introduced “so much complexity, so much choice and so many risks” in terms of people potentially making the wrong decisions.
When it comes to boosting engagement and understanding, she said a swath of remedies would be needed.
She agreed that focusing on engagement is more important than product innovation at this stage.
The PPI noted that a product that combines some of the flexibility of drawdown with the security of an annuity may help savers achieve more positive retirement outcomes.
However, it said people can already access a combination of security and flexibility by using multiple products, such as drawdown followed by an annuity.
But Smith said doing this is "complicated, and that’s why you need the support – you do need some advice to help you through that... it’s about educating and engaging people earlier on about what their choices look like”.
Accessible advice
The PPI report said innovations in technology and automation could help make advice and guidance more effective and accessible over the next 10 to 15 years.
Nathan Long, senior pension analyst at Hargreaves Lansdown, said: “Technology has a massive role to play, but I’m not necessarily convinced it’s going to be through the advice channel.”
He said technology can empower individuals to assess their finances and judge when independent financial advice is worth the cost.
“Of all the times that you could possibly want advice, the transition from work to retirement is a massive point of change,” he added.
Long also agreed that it is currently crucial to be focusing on engagement as opposed to product innovation.
“We’ve got two great products already – we’ve got income drawdown and we’ve got annuities, and actually the best solution for most people is to blend the two,” he said, adding that this is an approach many people overlook.
