A 'default option' should exist for pension decumulation
A new report on retirement income argues that in order to have an adequate pension, the British workforce 'needs to understand that - together with the employer - it has to save 15 per cent of its lifetime earnings in a pension scheme'.
The Independent Review of Retirement Income, launched by the Labour Party in 2014, suggests that a 'default' option similar to auto enrolment is needed when it comes to pension decumulation.
The report recommends that a good pension scheme needs to offer accessibility, inflation protection (either directly or via investment performance) and 'longevity insurance' to protect people against the risk of running out of money at the end of their life. It needs to provide value for money, with the benefits clearly and transparently exceeding the costs.
Crucially, people should not be expected to manage the risks involved in generating retirement income from pension savings themselves.
Those with pension assets between £30,000 and £100,000 should be provided with a retirement income plan that involves a simple decision tree with a limited set of pathways.
This plan would be self-started, following an advice meeting. The person using the plan would choose from a set of 'safe harbour' products that have been approved by the regulator.
The purpose of the decision tree would be to identify the products most suitable to meet the needs of those who do not wish to make financial decisions in relation to their retirement planning themselves.
The safe harbour products would include annuities, drawdown products and longevity insurance that meet minimum standards in terms of efficacy and deliver value for money. The plan member would have flexible access to the pension pot until the point that longevity insurance kicks in.
The review was led by Professor David Blake, director of the Pensions Institute at Cass Business School. He argued that year's pension changes were introduced 'overnight', without wider consultation.
Now, he warned, pension provision is no longer an institutional but an individual responsibility, but most people do not understand the associated risks such as inflation risk and longevity risk.
The current UK pension system has an underlying paradox, said Blake.
The success of auto-enrolment as a means of building a pension pot has been down to people's inertia; on the other end of the pension timeline, however, the success of pension freedoms is predicated by how well-informed, active and rational individuals are.
The decision tree and 'default' decumulation would address this issue.
To create a national narrative and deal with the myopia of the political system, the review suggests that a permanent Pensions, Care and Savings Commission should be created.
This would be an independent body that would have cross-party support and would make recommendations on issues related to pension and long-term savings. The review adds: 'A particularly important role for the PCSC would be to ensure intergenerational equity.'