In its first nine years, auto-enrolment’s incredible success has been built on how much people have been able to save into their pension pots.
Now the time has come to give serious consideration to how this new generation of savers will turn these savings into a reliable pension income.
This is because in the next decade people reliant on defined contribution workplace pensions to supplement the state pension will start to retire in large numbers.
What this means is that policymakers and providers need to make it easier to take a sustainable income from a DC pension – something that an overwhelming majority of savers say they want.
As it stands, the retirement options for the millions of people who only have DC savings are both complicated to use and require a certain level of expertise to achieve a sustainable level of retirement income.
Along with asset manager State Street Global Advisors, we have published "New Choices, Big Decisions", which reveals how the average saver finds it difficult to navigate the retirement choices available to them.
The study also sheds light on the behavioural biases that influence the decision making of those currently entering retirement.
These biases may cause savers to value the present more than the future and draw down from their DC funds too fast, risking extinguishing their funds long before they die.
It is because of these challenges that I was only too pleased to accept the invitation from the Work and Pensions Committee to give evidence last week to its post-pension-freedoms inquiry, which is focused on accessing pensions savings.
Products
In my evidence to the committee, I said that although guidance is important, providers need the freedom to offer a guided retirement income product, intended to provide a sustainable income, that mitigates the main financial risks posed by retirement.
This should, among other things, include protection against longevity risk to deliver better outcomes for members. This guided product should be easy to access and clearly signposted through the decumulation process, which is when savers take money from their pensions.
We need to embrace the reality that some retirees will need more than one product to make the most of their DC savings and mitigate the risks they face.
An individual might benefit from a drawdown product to stay invested for longer and take a higher income than might otherwise be possible.
They may subsequently need an annuity to manage longevity risk. In addition, they may also need a cash savings product, so that there is a fund for emergencies or unexpected events.
The two main challenges for the pensions industry and policy makers alike is to try to advise a larger proportion of those approaching retirement and to devise a solution that works for most people, which means avoiding complex choices and combining different products, capital allocation and a suggested drawdown rate that is intended to produce a good quality result for a typical individual.
