By Kathryn Fleming, Partner at Hymans Robertson
What the PPI research is focusing on is the need for innovation to avoid retirees with DC dependent savings making significant financial decisions without the right options and support.
What I love about the approach the PPI has taken is that they started with the retirees, put themselves in their shoes and explored the reality of what is driving the retirement decisions being taken – the archetypes. These are set out in the report to be:
Providing a secure income throughout retirement
Funding retirement prior to State Pension age
A savings account to use for occasional income to supplement other sources
Meeting one-off costs
Providing financial support for relatives
Saving for bequests, funeral expenses etc
From here, the PPI has looked at the pot sizes future retirees are likely to have, and when that is coupled with the fact that working and retirement has become more flexible, they have been able to illustrate the range of different retirement strategies needed to deliver optimal financial outcomes.
For example, they looked at the impact of taking cash, going into drawdown then annuitising at age 70, 75 or 80. They then weaved in different income sources, changes in cognitive decline or changes to family circumstances to see which strategy will give an optimal financial outcome for a range of different sample members. What was astonishing to me was that the research has shown that most retirement strategies will benefit from a combination of guaranteed income and flexible withdrawal.
What this points towards is the scale of the challenge that this is presenting. Not only are we asking current and future retirees to engage with, and take one retirement decision - the almost insurmountable ask for the industry will be that we might need future retirees to take a series of decisions. We will need future retirees to have a flexible approach to accessing their savings. Decisions will need to factor in changes in health and household circumstances as these will change over time.
Is the industry up to the challenge?
I am going to say yes. The PPI report has pointed towards two existing products that have been designed with this flexibility in mind. They have also pointed towards successful strategies being delivered in other geographies (such as strategies based around deferred annuities, variable annuities or the recent Retirement Income Covenants introduced in Australia).
I personally feel that the only way we can seek to deliver flexible retirement hybrid strategies successfully, is to ask the industry to come together and agree on archetypes and language, similar to what has been done when introducing the Investment Pathways (and I will come back to them in a minute).
If the pensions industry does develop these innovative flexible retirement hybrid strategies, then they will also need to be supported by personalised guidance and/or affordable advice to and through retirement. The PPI does point towards a role for something like a mid-retirement MOT at around age 75. I'm supportive of this idea, a pension health check every 5 years could act as a bit of safety net. Back to the Investment Pathways, the PPI also points towards further pathways being designed to deliver these hybrid approaches, building on a framework that already exists.
This research really does feel like it has shed the light on the challenge the industry faces in delivering guaranteed income strategies for future retirees. It also strengthens the evidence that there is a need to develop these strategies sooner rather than later as there is growing pressures on DC savings, and a need to make the money work for different individuals. Are these the ideal forms of income strategies? Ideal will take time, but designing something flexible is the right direction to take.
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