‘Back to the drawing board’: Decumulation guidance not working

James Phillips reports

Three-quarters of pension scheme members want guidance before drawing down on their pension pot but current client options are “not working”, according to The People’s Pension.

In a poll of 2,116 adults carried out by YouGov between 12 and 15 February, nearly four in ten told the master trust that they would be prepared to be guided towards a hybrid decumulation product, using both a guaranteed regular income and a flexible income pot, after having taken a lump sum. Another 35% opted for an annuity and lump sum option.

The findings follow on from the provider’s New Choices, Big Decisions report, published in January with State Street Global Advisors and Ignition House, which found that many savers were “sleepwalking into retirement”, with their pension running out during their 80s.

Speaking on a webinar held with Prospect on 2 March, The People’s Pension director of policy Phil Brown said: “The choice architecture that is in place at the moment is not actually working. We need to go back to the drawing board.”

He said auto-enrolment (AE) providers have an opportunity to do something different, offering not just a single product at retirement, and helping with guidance.

“The real challenge here is one of information asymmetry and that actually flows in both directions,” said Brown. “If a scheme wants to provide guidance, it needs to know more about the individual than what’s in their retirement pot.”

The survey also found a third did not know when they would retire, including 22% of those aged 55 or over, while only 12% knew or guessed the weekly value of the state pension.

Nearly a third said they had no idea what to do with their savings at retirement.

On the same webinar, Work and Pensions Committee member and Conservative MP Nigel Mills said there was a “heroic assumption” that people will understand and engage when they get to retirement, but with AE based on inertia this was unlikely.

He also admitted that Pension Wise take-up has been “nowhere near what we hoped for”, while State Street Global Advisors head of EMEA pensions and retirement strategy Alistair Byrne noted that “telling them they need to shop around is not going to be the answer”.

Ignition House founder Jeanette Weir said there were “deep-seated behavioural barriers” preventing savers from wanting to engage in planning for retirement, including that they may be scared that they would find out they were not on track for the retirement they wanted.

And while investment pathways have been introduced as a way to help guide savers to the outcomes they desire, savers “find it quite difficult to align themselves to one of the pathways”, she said.

“We have presented members with a binary choice. They either do it themselves, or they pay up and take some professional financial advice.”