My friend Jim Hennington points me towards interesting behavioural research from active fund manager MFS.
The concern is real; we don’t know what to do when we get down to converting a savings pot to a retirement income
So , according to this work, our top three worries are that are money runs out befor we do, we won’t have enough in later life to maintain our lifestyle and that the markets will kyber our savings.
And we don’t know who to turn to for help
I think it’s worth picking up on some of the differences between geographies. The USA and Canadian retirement savers take more advice, consider themselves more aware of investment risk and do not rely on their employer or plan manager for support. The Commonwealth Model of UK and Australia are less likely to pay for financial advice and more likely to rely on employers and their plan managers. In both the UK and Australia , adequacy is more an issue than wealth management. In the USA and Canada it is the other way round.
Insecurity was not supposed to be part of the plan
Most of us participate in collective savins plans, wherever we are in the world and the idea of a plan , is that it takes care of the future. But the plan doesn’t seem to be working for most people who appear chronically insecure about their financial futures.
But it’s worse than just not knowing what is going to happen, a very large number of people saving for their retirement in workplace pensions around the world just don’t understand what the plan is!
It is particularly shocking that those questionsed from the USA and Canada – where levels of advice are higher- know so little about their plans. Growth is not guaranteed, de-risking is not generally applied and the idea that the plan provides a guaranteed pension is a myth for all but a handful (who were not included in this survey).
The myth of the supportive employer
Education and guidance can help, and employers can play an important role. UK and Australian sponsors have become more involved in educating their members. And the data show that members are looking to their employers for help. – MFS Global Retirement Survey
This is where bias may enter into the survey. If we mean by “sponsor” the organisation that manages the funding of the pension pot via payroll, then I suspect that the kind of “education and guidance” that MFS are thinking about is in shorter supply than it supposes.
While some employers will pay for advisors to talk to staff about choices, this is generally left to the plan managers – typically insurers or master trusts (sometimes both). And the amount of education and guidance going on in the workplace is decreasing as this service is increasingly going on remotely and often not in worktime.
The support an employer can give is to find a plan manager that is providing support on the key issues. So in Australia, we are seeing sponsors developing product like Q-Super which provides an income for retirement without the need for advice and without an intervention from an employer.
I don’t see many UK members of workplace pensions expecting education and guidance from employers, it now comes from the workplace pension providers.
This myth of the suppotive employer is a hangover from the days when employers saw it as their responsibility to provide pensions to their valued staff which could help them retire on a gauranteed income. But that responsibility is no longer in place, it has been replaced by an obligation to pay contributions at a set rate – but little more.
I suspect that so long as the answer is assumed to be with employers and advisers, plan managers will be off the hook for delivering to the expectations of more than half of the global population surveyed who are expecting their saver’s pots to convert to a “guaranteed steam of income at retirement”.
But I suspect that we are currently in an inter-regnum, where the responsibility and power to make such things happen, is still thought to be with the employers and has not yet been assumed by the plan manager.
Misunderstandings give best insights
It’s often when evidence collides with myth, that we see the direction of future travel. This is the case with the MFS survey which reverts to a traditional support model, probably because employers have historically picked up asset managers costs through DB trusts.
But the world is moving on, employers buy fund platforms and fund platforms employ asset managers and their funds.
The power to pay pensions from pots rests with those who manage the pots , not those who funded them.
This fundamental shift of control and support is likely to be key to the development of DC and while a high proportion of DC savers will use advisers to manage their individual retirement cashflows and invest their money, the majority of savers will rely on their pension plan manager to provide them with a pension that lasts as long as they do.
Thanks to MFS
This research confirms my supposition that the USA and Canada are more intersted in money management than savers in the UK and Australia. It confirms my understanding that retirement advice is more prevalent in the USA and Canada and most importantly is suggests that the majority of savers around the world expect pension savings to convert to pensions on retirement.
I hope MFS will not take it amiss when I disagree with their analysis of how we tread “the Road to Better Outcomes”. It is enough that they remind us of our insecurities.
We worry because we suspect the pension plans we think we’ve made, may not turn out quite as expected.