Wrong in the right way – LGIM are right in everything but their conclusions

RIP’s or investment pathways as they are more commonly known, don’t default you into a course of action but ask you to choose between four courses of action (with the option to do whatever you like as a fifth).

They are designed for the “non-advised”, the vast majority of savers who reach retirement without the means or inclination to pay to be told what to do.

Legal and General Investment Management has produced a number of blogs on non-advised retirement options , leading from research conducted jointly with NMG. The research is very good but it leads me to the same conclusion as Andrew Warwick Thompson, that we will probably say RIP to RIPs before too long.

For those who get confused about what these investment pathways are, here is LGIM’s handy summary

The risk warning is interesting and shows how easy it is to confuse people. Many would consider an annuity an investment and of course annuity income is guaranteed.  Planning to “take my money as a long term income” does not sound like an investment but of course drawdown involves investment and the income is not guaranteed.

Matters are further complicated because many people consider a pension will be arranged for them because that’s what happens with the state pension and with company pensions that people of my age still remember (and even get!). Despite the popularity of the idea of pension freedoms (equated to freedom from pensions) most people do not want to make difficult choices about how they want their money back.

However , when they have things explained to them, it seems the investment pathways are quite popular

NMG surveyed 1200 people and weeded out those who had small pots (£10K or less) and some with pots less than £30k, this is a bit brutal and may have made for a more positive response (as we know small pots tend to be encashed). Nonetheless, 90% of people could see a pathway that said “walk this way” to them and that is encouraging.

But – and there is a but….

There is a big difference between understanding choices and taking a choice – as is evidenced elsewhere in LGIM’s research.

The researchers looked at the difference between what people thought they’d do and what they actually did, when looking for the information to take retirement choices

They found that pension providers remain the number-one
source of information for prospective retirees, but the light green people (those who had yet to take the choices) and the dark green people (who had taken choices) show quite different behaviour.

Almost invariably, people did a lot less of the things that were sensible and more of the things that weren’t – “none of these” being an ominous choice.

This is the big “but”, all the people surveyed in this separate research were not taking financial advice and were therefore “on their own”. These are the people dubbed by LGIM “the silver squeezed” and this does not make encouraging reading. When it comes to taking choices, only a third of savers were consulting with their pension provider at all.

It is expecting a lot to see investment pathways increasing this figure by much so we can expect in future to see around two thirds of those with pension pots, never finding the investment pathways in the first place.

Unsurprisingly, enthusiasm amongst the more sophisticated for investment pathways , wains as the grim reality of taking decisions sets in

Going back to defaults

Annuities don’t make for a good default and it’s as well that Osborne ditched them as he did. It’s getting on for seven years since he pulled that rabbit out of the hat and all we’ve got to help us are these investment pathways. They may become popular for the kind of people who go to Pension Wise and are financially diligent, but they do not look like working for those who don’t and aren’t.

There is still a huge hinterland of the population who find making big decisions a lot harder than understanding what their decision is. For such people, the business of turning a pot into a pension is very hard indeed and I suspect that while a lot of people say they are going to drawdown, a large proportion don’t and end up in a right old mess.

We need a default that works

For as long as I’ve been writing this blog (and it’s over 11 years now) , I have been talking up the scheme pension , paid from a fund at a consistent rate for as long as the person lives. This simple idea is what happens in funded DB schemes and it’s what will happen with CDC. It is the obvious way forward.

It will not happen overnight, we will have to wait for things to get a lot worse before it catches on, but it is what has to happen to convert all the people who LGIM have been talking to, from talking about it, to doing it – it being getting a pension!

Why LGIM are wrong in all the right ways!

I like everything about the retirement research being done by LGIM and I only wish they had the courage to own up to the inevitable conclusion that investment pathways, nice as they sound in principle, just won’t work in practice.

I would say “it’s back to drawing board”, if it wasn’t for CDC now being lawful and about to get a sizeable boot in the right direction when the DWP produce secondary regulations (hopefully in the next few weeks).

LGIM has a huge master trust which could and should become a CDC scheme, at least for those who are looking for a default retirement income pathway.

When I hear that news , I will cheer LGIM and Legal and General to the rafters as then they will be right in all the right ways!


About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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