Providers say retirement defaults could help poorer pensioners

Modelling by the Pensions Policy Institute in its latest issue of The DC Future Book suggests that future pensioners will have lower incomes in retirement until around 2050, due to the declining level of defined benefit provision.

Incomes will start to grow again from that date, providing measures like the triple lock on state pension provision are not removed, the research found.

The PPI also highlighted that the transition from DB to defined contribution will leave savers to bear three key risks; that investments do not perform as expected, that inflation outstrips growth in retirement income, and that pensioners outlive their retirement provision.

For bigger pots I think I would like to see as many people as possible take advice because this is a 25-year business

Steve Webb, Royal London

Improved life expectancy also means savers are more likely to provide for dependants later in life, both for elderly infirm parents and for their children.

The proportion of drawdown purchases made with independent financial advice actually rose from 2016 to 2017, albeit from a relatively low base – 55 per cent of sales were made with an adviser’s help.

This means less wealthy savers need help planning for retirement, according to asset manager and project sponsor Columbia Threadneedle Investments, which added its voice to growing support for the development of well-governed default retirement pathways to help mitigate these risks.

“At the point of retirement, navigating the complexity and the multiplicity of the decisions that come with freedom and choice has for many become overwhelming,” said Chris Wagstaff, the company's head of pensions and investment education.

Providers deciding appropriate flexibility

The Financial Conduct Authority has already proposed the creation of three different investment pathways for non-advised drawdown customers.

Beyond that, a handful of master trusts are building more comprehensive products involving elements of guaranteed income and set withdrawal rates, but are grappling with the appropriate amount of flexibility to give members.

Too little flexibility and a ‘one-size-fits-all’ default risks a bad outcome for the majority of members; too much flexibility and the solution may lack the oversight needed to stop members making bad decisions.

“If everyone in the land is going to be in this sort of boxed approach then you could end up with sub-optimal outcomes there,” said Darren Philp, head of policy at Smart Pension. He urged trustees to carefully test defaults to ensure they suit the lifestyle decisions actually faced by pensioners.

Allowing pensioners too many options once a product has been chosen could also have implications for investment efficiency and outperformance, said Gregg McClymont, director of policy and external affairs at B&CE.

He said that better investment outcomes could be achieved “the more certainty that the investor has about the cash flows”, pointing to the ability of Australian superfunds to hold outperforming alternative assets.

Defaults should not replace advice

Outside of the master trust industry, defaults have received a more cautious welcome.

“A lot depends on how much we’re talking about,” said Steve Webb, director of policy at Royal London. “For bigger pots I think I would like to see as many people as possible take advice because this is a 25-year business.”

However, Webb said that defaults could be useful for nudging pensioners away from withdrawing into cash Isas exposed to inflation.

"If you’ve saved £20,000 or with Nest or somebody, an adviser is not going to advise you,” he said.