Why improving value depends on meaningful guidance
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Pardon the Interruption
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Pensions reform moves at a glacial pace, advancing and retreating according to the temperature of the landscape. However, the Department for Work and Pensions’ roadmap looks to be under full steam, following the recent confirmation from pensions minister Torsten Bell that it is very much in its “delivery phase”.
That next phase of the roadmap is focused on consolidation and delivering value for money for members. Developing scale while achieving lower cost investments that deliver better returns for members is laudable, but leaves some critical components unaddressed.
Don’t stop until you’ve got enough
One of the most important omissions remains that of adequacy. The auto-enrolment project – which began almost 15 years ago – has greatly increased participation in workplace pension saving, yet members do not save enough. VfM is a start, but it will only deliver somewhat optimised returns yet ultimately inadequate pension savings for the average member.
“The main challenge is actually going to be adequacy, not value,” says Martin Willis, partner, corporate DC pensions at Howden. “As the Pensions Commission has discussed, there are a lot of people on track for poor outcomes, including the self-employed, so value has to be a part of the adequacy equation.”
Adequacy lies with the Pensions Commission, whose report is not expected for nearly another year. By the time this is tackled by DWP and government agencies, the first cohorts of a ‘lost generation’ of DC savers will discover that the reforms will not deliver meaningful impact to them.
As a first step, Willis would remove the band earnings regulations to make contributions available across an individual’s total earnings. He does not believe this needs to be “massively financially burdensome in order to help those people who need it the most”.
Decisions at retirement
VfM and adequacy hinge not only on how much someone has saved during their working life, but how much income it can generate in retirement. An imperfect at-retirement market became a minefield for the unwary – particularly the unadvised – with the arrival of freedom and choice in 2015.
The stagnation of the annuity market saw the number of firms offering the products reduce and very little by way of innovation for several years. But this does not mean that consumers are necessarily getting a raw deal, says financial adviser, Billy Burrows, founder of the Annuity Project.
“People think annuities are poor value for money, but there's lots of academic research that shows they offer good value,” says Burrows. “For those going into drawdown, the truth is that there are some really good, low-cost solutions at the platform level and through investment funds.”
The problem is that people do not take advice. Targeted support – something beyond mere guidance – has yet to move beyond the theoretical stage. The Pension Wise service has failed to attract much interest and has operated as a hygiene factor for the industry.
Without meaningful guidance, members will fail to obtain value for money in retirement, as the lack of choice is “effectively creating a safety net to avoid bad outcomes rather than truly generating good outcomes”, says Willis.
A need for more defaults
Just as auto-enrolment has made use of defaults for the growth phase of saving, default retirement options – such as guided retirement – has been considered.
Collective DC has received a recent boost from regulators as well as a groundswell among employers. If provided by an insurer, it may appear less an innovation than the revision of the once popular with-profits fund. But VfM needs to be considered here, too, says Mike Ambery, retirement and savings director at Standard Life.
“Whether we call it retirement CDC or not, it's an evolution of a product that already exists,” says Amber. “But such a default seeks to address a problem arising from requiring individuals to make a decision about their futures at a single point in time.”
Arguably, the ‘flex and fix’ products already available on the market will achieve the same outcome, but without targeted support, there remains a problem. The consumer still needs to indicate their preferences – if they know what they are – but there may well be a data gap, as the long-awaited dashboards are not yet available.
“Guidance will give better value, but at the point of retirement we're not truly addressing the full piece around guided retirement,” says Ambery. Though he believes the adoption of AI will “supercharge the digital direction and drive towards better data”, there remain difficulties in execution.
More needs to be done
Retirement CDC might offer a solution that will appeal to many thousands of consumers but is not likely to be an advised product.
“To be effective, we need some innovation in order to offer something that will allow households to make the right decision for their needs,” says Ambery.
Yet until these matters are addressed, providers – or the private sector in general – will not invest in new products or infrastructure in the hope that regulation falls in line with their thinking.
An incremental approach from regulators is understandable, but focusing on growth rather than how much growth is required to achieve desired levels of income, will prevent many consumers from getting value for money from their pension saving.
