How much flexibility do DC savers want?


PPIThe PPI have taken research conducted by  Opinium on 1000 individuals aged over 40 actively saving into DC and come up with their own analysis.

The report suggests that in this group there is a high level of awareness of the new Pension Freedoms.

But the research is problematic as it is informing on a particular group of savers and while I don’t want to criticise the PPI- who can only work on the data that’s presented to them-I think the conclusions of the report should not be relied upon as an indication of the nation’s readiness for April 2015.

The PPI have been working on an “odd”dataset.

What is odd is that the sample claim to have average £150,000 (men) and £100,000(women) in pension savings. This is against an average pot of £36,000 used to purchase an annuity last year.

Alliance Bernstein tell me that the 1000 individuals were part of “client control groups” . This may  be as interesting as the PPI research as it seems that people who have the sophisticated Alliance Bernstein target date funds have a lot more DC money than the ordinary Joe.

My guess is that there are many DC constituencies out there

  1. DB occupational scheme members with DC pots
  2. DC occupational scheme members  (and those with sponsored DC plans)
  3. People who have DC from their own endeavours
  4. People who have no DC or simply a contracted out pot.

It sounds to me that Alliance Bernstein’s pollsters are tapping  into the more DC affluent groups  (1-2) (Alliance Bernstein clients).

There is a radical difference between the investment strategies employed by sophisticated workplace schemes and those adopted by most private savers (and those in old-fashioned unsophisticated workplace schemes).

The PPI research suggests where the group analysed are life styling or target dating. This suggests that they are in schemes where a default has been chosen relatively recently and probably by an employer under advice. Alliance Bernstein clients are all in “recently established or reviewed schemes”. Alliance Bernstein has only been acquiring DC clients in the UK for the last ten years

Other research suggests that the generality of the population are not in lifestyle or target date funds.

Recent research from Annuity Direct suggests that  people reach retirement with a variety of DC strategies- some self directed and some default, considerably less of this money has been “de-risked” some 70% of the money Annuity Direct cash out is still in equities. Most of this money is coming from groups (3-4) , those who saved into personal pensions on their own account, not having an employer to help them with a contribution or an investment strategy.

So the PPI group are different not just in the size of pot, but in the sophistication of the advice surrounding the investment of their pension savings.

What seems common across all groups is that most people are ‘defaulters’

Even analysing their rarefied group of pension savers with decent sized pots, the PPI state that

“As with the accumulation stage – there will be a substantial group of individuals who do not wish to engage in decision-making around their retirement provision”.

I would suggest that even among the more sophisticated group, there is a substantial majority of savers who do not want to take responsibility for the investment of their retirement funds.

For these people the PPI recommend that

“pension savings are likely to be invested in a default strategy and it is important that it is sufficiently flexible to meet their needs”.

The difficulty is not with creating such a strategy, it is of course precisely the strategy that we set out with in the 1980s (and which many small pots are still invested in).

The question is why should we be wanting to create more than one default! Why is there not a collective Default covering huge number of schemes that delivers results though simplifying things?

For though we have created a DC world designed to deal with certainty, an expensive apparatus of choice that allows everyone to go their own way – this apparatus is for many – redundant.

It seems that many (in not most) people do not value this choice, they simply want a default that does all things to all men (and women). They also want help on what is the optimum level of certainty for the average person.

The real choice facing people from 2015 onwards is between flexibility and certainty.

Ultimately people, if they make a choice, are not going to be deciding on whether to invest in equities, bonds or even Lamborghinis but between the different levels of certainty offered by annuities, collective schemes and individual drawdown.

I suspect (like the PPI) that most people who had no interest in taking investment decisions on the way up, will have no interest in taking investment decisions on the way down.

Where people have engaged in their pension saving was in the rate at which they contributed. I suspect that where most people will get engaged with their pensions “in decumulation” will be with the rate at which they spend their savings.

People need to understand the greater the flexibility, the more you take responsbility for your investment and spending, the greater the risk of money running out and the lower the certainty you can have in the future.

For these serial defaulters, the attraction of collective schemes will be in their capacity to take the  decision about certainty  away from them. CDC schemes may become the accepted compromised between absolute certainty (annuities) and total freedom (flexible drawdown). In practice , many people may mix and match.

If you can choose how much of your pension savings you want invested in a CDC scheme yielding a 6% increasing income for life (let us say) then you can mix and match between other options which may give greater or lesser degrees of certainty around the “spendability” of the retirement pot.

The infinite spending flexibility of a pension bank account is at one extreme of the certainty spectrum- it provides certainty to meet short-term needs with great uncertainty down the line, the annuity is at the other end of the same spectrum.

And if you give the average person the choice of where they want to be, they will choose somewhere around the middle – proving the old adage that most solutions arise from how you frame the question.

If my analysis is right, I think that we can draw three conclusions from the PPI research

  1. There are no certainties around retirement (other than uncertainty)
  2. When faced with an impossible choice- people will look for default solutions
  3. Default solutions suggest collective approaches will win out in time over advised solutions (at least for the defaulters).
  4. Over time the default accumulation glide-path will settle on the default decumulation option
  5. The default decumulation option will not be annuities nor spend-spend-spend but something in the middle.

Point three needs a lot of qualification since there will be a substantial minority by number (and a more substantial group by assets) who will want to adopt bespoke investment strategies (or at least have them drawn up for them by advisers).

It would seem from the PPI research conducted so far that rather than concentrating on “exploring the complexity of decision making for savers in DC pensions..” it could do its next work  exploring the trade-offs between flexibility and certainty and how they play with the general public.



About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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4 Responses to How much flexibility do DC savers want?

  1. Duncan S says:

    I believe (or hope) common sense will start to surface at some point in this debate. If there is no “one size fits all” solution, and most people do not want to make a choice, then it seems to me the Industry must take charge and design a series of solutions that are more appropriate to certain cohorts.
    So the default takes a more appropriate approach to the members investing in it, and the increased responsibilities of Trustees and IGC’s make sure they tick all the Governance boxes.
    I believe we are also falling into the trap of thinking about the retirement decision in a conventional sense, in that we assume people will retire and then start de-cumulation. I very much doubt that!
    De-cumulation starts when the pension bank account becomes accessible, and for a few years becomes another source of income, until eventual retirement. Yes there are a few potential tax complications to think about here, but the shift in behavior is all about accessing pension income to top up earnings not replace it – now design a de-cumulation strategy around that!!

    • henry tapper says:

      Thanks Duncan
      your point about sequences is a really good one- people’s later life financing will be more complicated than “accumulate/decumulate”

  2. Wladek Koch says:

    Agree with Henry. In the real world some people will have several pension pots with different default funds – options and glide path period – only complicating matters further!

    At the end of the day we need to see life through the eyes of the end consumer not the manufacturer of the financial product or service.

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