If you were building a pathway you wouldn’t start in the middle, you’d want to know your start and end points and plan the whole route. Starting in the middle would mean taking some arbitrary judgments on future and past directions of travel.
Most DC plans seem to be starting their investment pathways in the middle, some years after a lifestyle path has been laid out and some years before the critical point in retirement when the pension takes over from work.
Difficult choice architecture
One master trust wrote to me last week for help modelling outcomes for nine lifestyle strategies. This doesn’t sound so much a pathway as a maze. To find your way onto the right path, you have to choose between one of many lifestyle strategies, presumably catering for different risk appetites and different intentions as to how to meet the pot out in retirement.
There are obvious advantages to giving people multiple choice, but it does put the onus on the individual to make the right decision (a further risk transfer that may or not be welcomed by the saver).
I can see why trustees feel that complex choice architecture is appropriate for an important decision like how to spend your pension pot, but how best to implement such complexity into a mature scheme and how do you ensure that people both understand the differences and recognize which approach is most suitable to them.
Another master trust, similar in size and equally mature has started out by questioning whether lifestyling is doing more good than bad. The trustees have worked out that their members are taking the wrong benefits at the wrong time so the lifestyling is leading to problems – either that it isn’t protecting enough or protecting too much. People can lose as much by not being in the market in the right time as being in the market at the wrong time. As an adviser point out
These problems of uncertainty around when members will take their benefits and in what form they take them has led many trustees and some providers to settle on a minimum detriment approach – choosing a derisking timeframe and asset mix that avoids doing serious harm to members who don’t behave as we expected them to (!). The price paid is that we are no longer even trying to optimise individual member outcomes.
This is the consequence of starting in the middle, you don’t know where your members are coming from or where they are going. Default lifestyles end up as difficult as the multiple strategies mentioned earlier.
Can technology help?
If trustees still feel they can “try to optimise individual outcomes” they face the challenge that members are hard to talk to and don’t respond well to the kind of communications that pension providers employ (paper or telephone based interaction on these complex topics is clunky, uninformative and inefficient).
There is a view that digital engagement offers a far better chance of success, with interaction made intuitive and with behavioural nudges to improve the chances of good outcomes.
But sadly for many schemes, having regular high value digitally enabled exchanges with most members still remains a pipe dream. My worry is that many trust based DC schemes are adopting pathways that rely on engagement which isn’t there and isn’t likely to be there in the foreseeable.
Providers like Pension Bee, that engage with savers from the start are at an advantage. The remarkable success of Pension Bee, Open Money, and Smarterly (now Cushon) in getting new customers and new investment is down to a perception both from savers and from those providing development capital, that schemes that speak to members in a suitable way, will be the long-term winners.
In my view, the available market for these kind of services is primarily among savers who are savvy enough to seek out the right kind of schemes. There remains a problem with the lumpen, who will not get that far.
Designing pathways for the lumpen.
You may feel I am being derogatory in describing the mass of savers as “lumpen”, I don’t mean to be- most people chose to prioritize their time not thinking about how to convert cash into pensions and it’s probably a good thing that they do. If people want optimal solutions from their retirement savings, they rely on their employers to find them solutions and contribute to workplace pensions because they trust employer- provider and trustee to get things right.
They are also vaguely aware that Government is standing behind pensions and won’t let matters go badly wrong. That is about as much engagement as you are going to get from the lumpen.
A cynic will now stop reading , expecting me to confirm that we can’t expect to provide optimal solutions to those who don’t engage. The cynics may be right that there are no optimal solutions right now, but they are wrong if they think that there may not be in the future.
The golden pathway
I was brought up reading a Golden Pathway to a Treasury of Knowledge. I still have volume 7 (pictured). The key to the Treasury was knowledge and sticking to the pathway. There was only one pathway, which made things very simple and made me very happy.
I think that such a golden pathway exists through most of life’s tough decisions but it comes at the expense of many other pathways which may be even more valuable but require a lot of extra learning (which didn’t seem too much fun when there were other things to do).
The Golden Pathway was popular because it made life simple and for generations, it became a standard way of getting there! I see a collective approach to the spending of our defined contribution pension pots as the golden pathway.