Are “Do it for me” pensions on the way?

When asked explicitly for their preference on what kind of support they would like their provider to have in place, the vast majority, 78%, wanted some sort of help from their provider to make their decisions; just 22% were confident to do it on their own (or with help of an IFA)  DCIF- Evolution not revolution

Here are the preference expressed by Ignition House’s sample group

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The confidence levels hers are particularly interesting in the light of findings about how much risk people are prepared to take of their money running out.

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Screenshot 2019-11-18 at 06.02.42The key finding is that there is a correlation in the proportion of people prepared to DIY and prepared to accept a lot of later life risk.

Whether there is a correlation, not just in the numbers, but in it being the same people correlating isn’t clear but I would hazard a guess that around a quarter of us are prepared to take our chances on the market and that this is the group who IFAs are targeting for wealth management.

If I’m right, then the findings are suggesting that the 75% of so who fall into the red and blue boxes are people who are prepared to hand their freedoms to the providers of their pensions (presumably because they see the job of pension providers as being to provide some kind of pension ).

This is grist for the “collective solutions” mill but it is also a strong argument for choice architecture laid out with conviction by the providers of the pension pots. Evolution not revolution makes it clear that this is a big challenge which has yet to be met

In conclusion, it seems unwise to assume that members will just want to use drawdown to create sustainable income. Many will prefer to aim for higher income even if that means it won’t last a lifetime. But helping members understand these choices is a huge challenge made more difficult by the fact that not all will want to engage.

The challenge for any form of collective is to manage those people who want to have access to the steering wheel, while handing over the keys to a chauffeur.

In my opinion , this will almost certainly lead to auto-enrolment into a default decumulation strategy of some kind, if only to satisfy the societal need to protect the bulk of  people from not spending or over-spending.

The introduction of investment pathways seems the first step down this road. The logical next step will be to define the most used pathways as “default” and the third step will be to get people to opt-out of these defaults. I see no return to compulsory annuitisation for those who can’t meet a minimum income guarantee.

My hunch is strengthened by this chart, again from Evolution not revolution, which shows that well over half of the people surveyed have no retirement plan, other than to roll up their money until something comes along.

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The big strategic call for Government , regulators and providers is in how to respond to this demand for what the report is calling “do it for me” pensions.

Those arguing against collective decumulation can do so legitimately – by pointing to the divergence within the graphs between “what people want”. But if collective pensions can be constructed that allow people the flexibility to set their income levels and make withdrawals or even “top ups”, then I think the arguments for CDC in retirement will become much more resilient.

We have seen over the years that most people adopt a “set and go” approach to the way they participate in long term savings plans (rarely using plan features such as switching, contribution flexibility or offers of guaranteed insurability on life cover).

It’s reasonable to expect people to behave in the same way on the “way down”.  Giving people the choices on how to adjust the dial in terms of income at outset may become the key to engaging people with the risks of taking too much (or too little) initial income.

But setting a default setting for the dial , being the sustainable rate at which pension can be paid, may become the key job of a pension provider.

Giving people the option of participating in the longevity pool, so they enjoy the security of knowing their income will last as long as they do, may become another key feature. If participation in the longevity pool is something you have to opt-out of, then we can expect most people to stay in – as they generally do. Opting-out of the mortality pool will become the option for the 25% who DIY, staying in the pool – will be the option for the 75% who don’t.

An interesting behavioural point here, is that those who most benefit from staying in the pool are the wealthy, we traditionally live longer, if they self-exclude, pooling benefits the rest of the retiring population more.

“Do it for me” pensions

CDC is a pretty crap brand – it doesn’t tell you anything about what you are getting and is just three bits of jargon “collective” “defined” “contribution”.

The mood music of Evolution not revolution is that people are putting off taking lifetime decisions on their pensions because the choice architecture isn’t right. People are making it clear what the choice architecture should be and clearly 75% or more people would like to have pensions done for them – albeit with some capacity to take back the wheel from time to time.

This says to me that three quarters of people do not want DIY personal pensions, they want something in which they participate, as they participate in state or traditional company pensions.

The task of those who have traditionally designed company pensions is to design something to meet this need. It doesn’t need to be called CDC – it could be called “do it for me” or something else. But the need is there and the product will surely follow.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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1 Response to Are “Do it for me” pensions on the way?

  1. Phil Castle says:

    Entirely agree. It matches our experiences with clients and what they want.

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