Scottish Widows’ Emma Watkins

Pension Age (and others) report that its research found a disconnect between what people want from their retirement income and what products they are actually choosing.

In particular, the survey found that while 80 per cent of people wanted a product that provided a guaranteed income for life, a minority of customers are purchasing an annuity product that offers this.

A further problem emerges from the analysis of 1500 savers at retirement

In addition to this, more than half (55 per cent) said a predictable income was important to them for budgeting, yet most people selected an income dependent on investment returns product (Sic).

This has prompted this headline from Corporate Adviser

The results of the analysis explain where the disconnect is. It’s an oddity of Scottish Widows promotion of its latest research that the headlines offered to the trade press are not included in the report itself.

Four into two won’t go

The problem arises because people want a guaranteed (1) and consistent (2) income and control of investments (3) and what amounts to a full  transfer value paid to their estate or beneficiaries(4).

Emma Watkins , who appears to be the author of the report, remarks that a third of respondents wanted control over the legacy from their pension. Obviously people can leave pensions to their spouses but its the concept of intergenerational transfer that is creating the disconnect between what people want and what they buy.

The report does not quote that 80% of those interviewed confirmed they wanted a regular income paid for life , preferring to advertise a bizarre cube of choice

A product for all seasons

Scottish Widows marketing department concludes that it has all bases covered.

Generally, people want an income for life,
but with the ability to pass something on
to their dependents should they pass away
early in retirement.

We can see that peak demand emerges at the
top left of the cube. This need for consistent
income with the ability to pass on can be
met by an annuity (single life or joint, with
a guarantee period or with value protection
that pays out on death), or a mix of annuity
and drawdown.

Within that, there is a meaningful majority in
favour of a consistent income, which implies
some sort of ‘smoothing’ of returns over time.

This could be an increasing annuity with a
guarantee or value protect or a mix of annuity
with drawdown with a bias to annuity.
There is however enough demand for
propositions which don’t facilitate
smoothing for these also to be worthwhile.

It’s that easy!

But anything can be accomplished with advice…..

Inherent to the paper is the concept of advice. With 80% of savers saying they want the same thing , it is not surprising that a simple presentation of choice (choice architecture) is preferred to the equal presentation of choice via “investment pathways”. Advisers who have limited capacity ,will not be overly concerned that only 14% of savers want to dig deep  for their services, it is interesting to see if simplified advice can be delivered from as low as £50 per saver.

Corresponding to options 1-4 below

The most popular option (presumably at £0) is the presentation of choices in an easy to understand way (with a default). This is more than twice as popular than providing DIY modellers and Amazon style guidance. Appetite to pay advisers is very limited and Scottish Widows clearly feel that full advice (at a hefty price ) is “optimal”

Scottish Widow’s Peter Glancy

Lessons to be learned

There is one important consideration not covered by this research – value for the saver’s money. All of the features want from their product, guaranteed consistent income and inheritability can be provided but at a price. The guarantee has a cost (which is not paid with income drawdown and CDC), consistency has a cost compared with the flexibility of flexi-access and the price of inheritability is the loss of longevity pooling which impacts the rate.

Right now, for those with an inheritance tax issue, there is a bias towards legacy products which can provide inheritability tax-free.

Scottish Widows operate what they call “Guidance +” with the investment pathways offered though its non-advised workplace GPP contracts. It will need to offer “choice architecture for its workplace master trust and it will provide support to advisers through simplified and fully advised products.

I suspect that demand for advice in the workplace will be limited to the few savers with large balances and a need for multi-product solutions and that the majority of advice will be delivered outside the workplace (as it is today). For such people there is the cube.

A big question for insurers such as Scottish Widows is whether insured solutions can compete with pension solutions emerging using non-insured products. Our research suggests that pensions paid using the traditional method employed by defined benefit arrangements will provide some needed competition to the annuity and a welcome respite from the need to make choices about which many savers feel very uncomfortable,

Quoted in Financial Adviser , Scottish Widows said

“there was a ‘misunderstanding’ pension providers could simply solve the pension savings gap by developing innovative products”.

To date we haven’t seen the products and we haven’t seen much else. Perhaps we should think again about legacy, advice, guidance +, smoothed drawdown, unit linked annuities and return to where we started – pensions.