If you thought that the FCA’s Retirement Income Study painted a messy picture of how we are turning pots into pensions, then take a look at Corporate Adviser’s Workplace Pensions Into Retirement Report. The FCA report on a relatively orderly part of the market but see the vast majority of non-advised  savers either doing nothing (the new default) or cashing out their pension pot. Those who drawdown are doing so at rates that suit their short-term cash flow (typically at 8% pa), this rate is not considered sustainable by any provider (as Corporate Adviser’s report shows). That’s the good news.

The bad news is that everything that is happening in GPP land is happening worse in master trust land. Let me quote a few excerpts from John Greenwood and Emma Simon’s excellent study.

The report shows that the retirement outcomes savers get is a provider lottery determined by their employer and not by them . The lottery extends to which part of a provider’s product set you find yourself in.

Even within the same provider, different cohorts of retirees are experiencing vastly different investment returns as they meet state pension age or their chosen retirement date, highlighting the huge risks placed on investors by the switch from defined benefit (DB) to defined contribution (DC) pensions.

The study challenges the conventional strategies employed by providers

The claim that default glide paths ‘move investors to more secure assets as they approach retirement’ is getting increasingly hard for providers to make with real conviction.

It concludes that savers are inadequately prepared and supported for taking the big decisions on how to spend their retirement savings

When it comes to the behaviour of savers at retirement, it is clear that the majority of retirees are yet to see their DC pot as
anything other than a long-term savings plan.

As I have written about my earlier blog today

This could be a policy failure to cancel auto-enrolment’s success.

Key findings

I do not want to stop you reading this study, it should be required reading for anyone who is interested and has a vested interest in turning savings pots into retirement income.

I will therefore quote selectively from the reports key findings , hoping that you will dig further

Savers are cashing out their pensions on a colossal scale. Virtually all retirees at Workers Pension Trust, Smart Pension Master Trust and Creative Pension Trust make full cash withdrawals, while more than three quarters of savers at L&G, Nest and The People’s Pension fully cash out

Retirees are those who access their pots for money, we know that over £26bn of workplace savings are currently “lost”, a huge amount more is currently ignored. The default option for savers is to do nothing, as there is no nudge to do something, most people are simply waiting for something to happen – for the pension in the workplace pension to arrive.

While workplace pensions offer similar investment strategies while saving is going on, they have wildly diverging strategies when the saving stops. Again the default strategy is where the saver is left day one after a glide path has ended. This is typically in a defensive strategy that has been damaged by the recent crash in bonds.

There is a massive difference in default funds’ pre-retirement investment outcomes for individuals retiring 12 months apart.
The average return of the one-day before retirement strategies of the defaults in the CAPA (Corporate Adviser Pensions
Average) universe in the year to 30 June 2022 was -4.79 per cent, compared to +6.71 per cent in the previous 12 months

Help for the non-advised?

Although GPPs and SIPPs now offer non-advised customers investment pathways, these pathways need not be followed, the default remains the “do nothing” option. Where the pathway is followed – there are huge differences in outcomes, because there is so much discretion given to providers as to how to allocate assets.

Following the annuity pathway would have lost you between 8% and a quarter of your retirement savings.

Not including charges

Investing into a drawdown pathway would have lost you between 2% and 10% of your money

Not including charges

Note that MaPS pathway comparison sites treats the value of these pathways as the same and simply compares on price. Note too that all these providers have IGCs and GAAs, I have yet to read an IGC or GAA report that did not conclude that these investment pathways were delivering value for money.

The Corporate Adviser study gives us similar insights for the growth and cash out pathways. Extraordinarily, savers looking to cash out their plans actually got on average  a negative return of nearly 3% with one provider delivering minus 10% against the “risk-free option”. I look forward to reading the IGC and GAA reports on this in April 2023.

Do nothing or do something – you need money to get help

This chart tells me what I need to know about the use of drawdown. Sophisticated strategies are confined to those with large pots and are driven by advice. Those with small pots are using drawdown to meet a cash flow shortfall and not for a lifetime pension

The final stages of the report deal with the fine tuning of drawdown via UFPLS, partial UFPLS, Drip-feed drawdown and looks at the access providers give to financial advice. It is only among those with six figure pension pots that there is any sense of sustainable pension planning.

Adviser’s requirements of workplace pensions are obscure!

By comparison , discussions around retirement living standards focus on maximising member outcomes through a made for them pension that pays more than an annuity.

Providers will have to balance the needs of the few with those of the many. For while the few savers with large pots have many options, those with small pots are seemingly being left to their own devices

The risks individuals are many and wide-ranging and include inflation risk, sequencing risk, longevity risk, the risk of
choosing the wrong product or of paying too much tax.
A majority take on these challenges without advice, and the figures revealed in this report show that the choices
they make vary from provider to provider, suggesting the way providers interact, and the functionality they offer
influences behaviour

In reality, this is true only where the level of engagement from the saver is sufficient for the optionality to be meaningful, for those not in the adviser’s “sweet spot”, something more fundamental seems to be needed.