Pensions - Articles - Lack of innovation in pensions leaves DC members unprepared

Nearly half (41%) of pension professionals see improving member education as the main issue that must to be tackled for the DC industry to ensure members achieve good retirement outcomes, according to in a poll held at Hymans Robertson’s ‘Assessing the Future of DC’ event yesterday. However a panel of experts called for the industry to prioritise developing effective drawdown options alongside suitable, low cost, guidance if individuals are to have sustainable incomes in retirement. It concluded that a lack of innovation in the industry post pension freedoms leaves DC members woefully unprepared.

 Chair of the panel debate, Lee Hollingworth, Partner, Hymans Robertson says: “While there is a clear need for better education, there is an equal if not greater need for the industry to provide better support and guidance, particularly at retirement where we see people making poor decisions. 

 “For example, we know from FCA figures that a third of non-advised drawdown sales are being invested in cash funds.

 “The vast majority of people are underserved and unsupported with the decisions they now have to make at retirement. A huge swathe of the market simply cannot afford to access advice. While there is a desperate need for innovation, the industry is fearful of innovating in a way that provides much needed personalised guidance for fear of straying into advice. We’re currently in a situation where a fear of providing meaningful support in an affordable way means that many people have none.

 “It’s three years since pension freedoms were introduced and what is offered for drawdown investment remains in the stone-age. Drawdown needs to be seen as a service, not a product and investments should be personalised, and aligned to individual’s goals. We need to support individuals to manage their pensions in an appropriate way through the development of low cost tools and guidance that aren’t hampered by heavy regulation.

 “We also a need for a cap on the cost of drawdown solutions. There is a cap of 0.75% in workplace accumulation. Arguably there is a greater need for this in decumulation as this is when pots are at their largest.”

 Commenting on the need to help people consider sustainable drawdown rates, Lee continues: “One of the most important elements of this is how long people are likely to live, something they underestimate. Add this to variations in pot size and financial situations, and a ‘sustainable’ withdrawal can look very different for different consumers. It is vital for people to have a fully informed view of how long the pot needs to last if they are to make the right choices. The need for tools that help people better understand and frame their income in the context of their life expectancy could not be greater. Longevity risk is not being managed in current non-advised drawdown strategies.”

 Adding to the argument for a need for greater guidance for individual’s at retirement choices, Richard Butcher, Managing Director, PTL and Chairman of the Pensions and Lifetime Savings Association (PLSA) who was on the panel commented: "Our ‘Hitting the Target’ proposal for the development and widespread adoption of Retirement Income Targets is designed to help people make informed decisions about the standard of living they aspire to in later life and how much they’ll need to save to achieve it. Yet, even if this proposal is successful, it risks being undermined unless we also provide a framework for making informed decisions at the time they drawdown their hard saved pension pot. Default retirement pathways will do this – they’ll leave people free to decide but in a good position to make a decision. With greater understanding individuals will be able to use their retirement savings in a way that serves them best, and adapt their choices if they need. It shouldn’t be ‘set and forget’ otherwise they may ‘set and regret’ as they run out of money in later life.”

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