Drawdown solutions must be improved to offer pensioners greater certainty that their retirement income will last, a panel of specialists told Pensions Expert last week.
Speakers at FT Live’s Innovation in DC event suggested that collective products, trust-based drawdown and adoption of technology could all improve a landscape where savers struggle to gauge their longevity or expected returns on assets.
Since the introduction of freedom and choice in 2015, government pensions policy has largely focused on the accumulation phase, leaving development of decumulation products to the industry.
I think that’s where the future of drawdown probably lies… maybe not single employer but certainly mastertrusts, because you’ve got institutional pricing
Sonia Kataora, Barnett Waddingham
Research compiled by JPMorgan Asset Management on the preconceptions of US savers found that most individuals assume they can generate 10-11 per cent returns over 10 years, significantly higher than those projected by the company’s capital market assumptions.
Similarly, misconceptions exist around longevity, said Anne Lester, managing director and head of retirement solutions on JPMorgan AM’s global investment management solutions team.
“If you ask most people what their life expectancy is they will do one of two things; they will tell the age at which their parent of the same sex died, or they will say 87,” she said.
Given the sensitivity of drawdown planning to changes in investment markets, retirement age and contribution rates, Lester advocated a “bucketed” approach to post-retirement product development, aiming to cover essential spending with a form of secured income.
“We do think in the post-retirement landscape there will be, once you get above a certain level, the interest in having a portfolio of income solutions that can meet different needs,” she said.
That could prove difficult, given UK savers’ increasing mistrust of annuities. Since Thomson Reuters implemented its in-scheme drawdown service in November 2015, not a single member has bought an annuity.
Collectivisation for the greater good?
One solution to the security issue could be to introduce an element of collectivity into drawdown provision, either pooling investment assets to achieve institutional pricing, or even by sharing an element of longevity risk.
John Lawson, head of financial research for Aviva’s UK and Ireland life business, said it would be theoretically possible to develop this kind of product.
“We would choose the investment mix, we would choose the withdrawal strategy. You might be forced to reduce your income slightly in some years or forgo an income increase in some years, but those rules would be made clear to you at the outset,” he said.
“That solution might also include a guaranteed income at the optimum age,” adding that this would likely occur around 80, and would probably come in under the auto-enrolment charge cap.
Trust me, costs are lower
In-trust drawdown services have also been hailed as a way to keep costs down, thereby helping pensioners make their money last longer.
However, implementation of these services has been thinly spread, perhaps because employers are averse to meeting the set-up costs.
“We feel a very lonely sponsor in the UK given that we’re one of the few plans that are offering drawdown from a single employer trust,” said Matthew Webb, vice-president of benefits at Thomson Reuters.
“The reason we have done that is more based on cost to the member than anything else.”
Data crunch: How are DC schemes adjusting to the freedoms?
Less than 10 per cent of defined contribution default options intend to be targeting annuities in 2019. But what our research also shows is that while schemes are increasingly targeting drawdown as an outcome for members, few are planning to offer this within their scheme.
Despite the current dearth of in-scheme drawdown offerings, Sonia Kataora, an associate at Barnett Waddingham, is positive about the outlook for trust-based solutions.
“I think that’s where the future of drawdown probably lies … maybe not single employer but certainly mastertrusts, because you’ve got institutional pricing,” she said.
Embracing the tech revolution
There could also be a future for drawdown on an individual basis as technology drives costs down, said Lester.
She explained that better data gathering and improved communication techniques will fix some of the flawed member choices currently hindering drawdown.
“When [a members is] thinking about retiring at 62, it’s not a flyer in the mail that he doesn’t understand, written in language that means nothing to him, it’s an animated graphic that shows him in real time the consequences of that decision,” she said.
