Pensions education and default funds must be improved to ensure the success of auto-enrolment, experts have said, as findings raise questions about the risks members are taking.
The industry has long struggled with how to make pensions seem more accessible to non-experts, and simplification has been a stated aim of the industry for many years, but the general regulatory trend has been towards increased flexibility and options through policies such as freedom and choice and the Lifetime Isa.
Two of the three pensions ministers that I’ve served under have said in their introductory meeting to me, ‘I’ll do you out of a job, I’ll make pensions simple’. I’m not that worried
Michelle Cracknell, TPAS
Speaking at an event to launch the Pensions Policy Institute’s second edition of the Future Book, Michelle Cracknell, chief executive of the Pensions Advisory Service, said the options available to members are where the challenge lies.
“What’s complex is not the pensions product,” she said. “It’s the fact we have a multiplicity of different types of pension.”
However, Cracknell added: “Two of the three pensions ministers that I’ve served under have said in their introductory meeting to me… ‘I’ll do you out of a job, I’ll make pensions simple’. I’m not that worried.”
Lump sum withdrawals increase
Speaking at the event, Daniela Silcock, head of policy research at the Pensions Policy Institute, said a recent jump in the number of people withdrawing their savings through cash lump sums could point to riskier behaviour, but it was too early to draw any conclusions.
The number of cash withdrawals saw a sharp fall after the first quarter of freedom and choice, when those who had been waiting for the flexibility to be introduced were taking money out. It dropped to 46,012 in the second quarter from over 120,688 in the first. However, it has since increased to 87,000 in the first quarter of 2016.
“It’s jumped again in the last quarter,” said Silcock. “It’s really hard to say where that number is going to go and how people are going to use the cash.”
But while the number of withdrawals is increasing, the amount of money being withdrawn through lump sums has gone down to £750m in the first quarter of 2016, from £1.4bn in the second quarter of 2015.
It is not clear whether this points to risky behaviour from savers. “On the one hand many people would say, ‘If you only have a small lump sum it’s not risky to take your money out that way’,” Silcock said.
TPAS call volumes balloon since freedoms
TPAS has seen a 71 per cent increase in enquiries since the introduction of freedom and choice in April last year, showing the need for accessible guidance.
“But it’s very difficult for us to guarantee that a large number of people taking money out through lump sums wouldn’t have been far better off had they used it to buy an annuity or drawdown.”
Mark Fawcett, chief investment officer at government-backed mastertrust Nest, said successful outcomes in retirement would also depend on schemes having strong default funds to invest savings in, due to the high participation in such funds.
“Use of the default fund at Nest is 99.8 per cent of members… A high-quality default fund is absolutely vital,” he said.
