By Dale Critchley, Workplace Policy Manager, Aviva
The potential for poor quality ‘advice’ might be less of a concern if consumers were engaged and sufficiently informed to make good decisions on their own. However, when it comes to awareness around pension saving, the numbers are equally worrying:
• The FCA state that only 57% of savers said they read at least some of their annual statement.
• Aviva’s ‘Planning for Retirement in the 2050s’ report found 66% of middle-income earners in their 40’s are worried they are not saving enough .
• The same report revealed that 48% of savers in their 40’s had never heard of income drawdown, and 41% had never heard of an annuity.
It is clear, pension savers need more support. Auto enrolment has been a huge success in getting people saving. Changing auto enrolment to 18 years old and the abolition of the lower earnings threshold will help millions save more by default. However, 8% of earnings might not necessarily be enough to deliver the kind of retirement many savers aspire to, and there are potentially difficult decisions to make, especially at retirement.
The FCA’s discussion paper on the Advice Guidance Boundary Review acknowledges the difficulty in engaging individuals with pension saving. Behavioural biases get in the way because of the need to plan for an event which is perhaps 30 years or more in the future. The FCA also acknowledge the regulatory hurdles.
Trying to convey the need to act today about something many years in the future takes more than just providing information and leaving it to individuals to join the dots. The problem is that prompting an action that could lead to a different investment choice, a higher level of contribution, or consolidation of a pension pot, is likely to be viewed as marketing. The FCA have acknowledged that the Privacy and Electronic Communication Regulations (PECR) can be a problem when savers are automatically enrolled and are seeking views from pension providers.
The FCA’s most innovative suggestion is the implementation of a new type of help for consumers, which they are calling ‘targeted support’. Unlike advice, which relies on personal information and leads to a personal recommendation based on an individual’s circumstances, targeted support will deliver guidance for ‘people like you’. The initial data collection only needs to be enough to place an individual into the target market segment for a particular solution, or range of solutions, which might be recommended.
Rather than the solution being a highly personalised, optimal solution, the solution recommended through targeted support would provide “a better outcome for customers than would reasonably be expected if the customer did not receive any guidance”.
This could provide an opportunity to deliver more help for pension savers at key points throughout their savings journey. It could provide an opportunity to let individuals know what people like them should be saving. It might allow providers to contact savers who are invested in highly volatile investments as they approach retirement to head off that potential harm. Importantly it might enable targeted support for when people have decided to take their pension benefits, and throughout retirement if they are actively managing their retirement income.
It will be essential that providers design product solutions that meet the needs of specific customer segments, in line with consumer duty. This will ensure they have solutions that can fit within a targeted support framework. At retirement, customers looking for certainty around income might be pointed to an annuity, while someone who wants complete flexibility and has the capacity to deal with a volatile income could get a drawdown recommendation. Alternative solutions for people sitting between those two extremes might include collective defined contribution (CDC) or new products like that which Aviva is developing, which we are calling ‘Guided Retirement’ and will be a blend of flexible drawdown and an annuity, with targeted support built in.
The FCA describe their discussion paper as “high-level proposals”, reflecting “early thinking”. As far as early thinking goes targeted support sounds like a great idea, and something that should be explored further.
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