This week I will be focussing my work and blogs on ways we can help people to get what they want from their retirement pot. I’m not focussing on those who take advice but on the vast majority of us who take decisions on the choices presented to us. Forgive me for a long blog, but this is the burning platform for people of my age and it is a burning platform for Governments from Westminster to Canberra.
The way choice used to be
I remember the days when occupational DC plans and GPPs were nascent and we used to worry that most people wanted to do nothing. Trustees used to create KPIs for those who onboarded member demanding diversity of choice and would proudly proclaim at conferences that their scheme did not have a default.
Everyone is different , everyone gets their own strategy that meets their particular risk and reward profile. Run this through and you get propositions like Dimensional s that created an investment strategy that made us all our own CIO.
The trouble of course is that we don’t want to be our own CIO and resent being made to take choices we do not feel up to taking once, let alone on a regular basis; we do not want to commit to a life-sentence of financial decision making, we want things done for us.
So eventually, trustees and plan managers gave up on core funds, self select and focussed on delivering a default option which they moaned was equally bad for everyone. The default fund has been the revenge of the CIO on the financially illiterate – let them eat crap.
We are now repeating the process.
The second half of the DC “journey” involves not saving but spending. The challenges to the DC plan designer are not in how to maximise value from saving but the value of spending. Many people get their choices laid out to them, much as we designed back in the 1980s and 90s for their savings,
There are four approaches to the choice architecture conundrum
- Is to defer spending. This is a sensible strategy if there is no immediate need for the money and it plays into the hands of the tax-experts who would have you terrified of inheritance wealth taxes. The “do nothing” is the wealth management default as it is justifiable on fiscal and commercial grounds.
- Is to cash in your chips. Many people are pleasantly surprised by the windfall they have built up in their pension pot and choose to transfer it from the unknown hands of a pension manager to the known hands of a bank manager.
- Is to drawdown and keep options open; this is now considered the default as it can give people their cake and eat it – at least till the money runs out.
- Is to swap the pot for a pension; this requires forsaking options 1-3 in return for an income that lasts as long as you do. This is voluntarily chosen by about 1 in 10 people at retirement , though 80% say it is what they want.
If I think back to the decisions that were taken by savers before defaults came in , I remember that without a default , huge numbers of savers chose cash as their savings option, many chose a fund from a manager they’d heard of, some chose the best performers and a very large number of people invested in all the fund options available thinking they were spreading the risk.
In short, until a default was chosen for them, most people took random decisions which didn’t matter as the outcomes were so far away they didn’t care. Many of those decisions are now determining outcomes. If you’d been in cash or Japanese equities in the 1980s, you probably still are. These are real and meaningful choices we have taken and are taking.
What is happening with choice architecture is different
Whereas in the 1980s, 1990s and 2000s, we were investing for the 2020s and beyond, the saver making choices about their money today is in need of a financial plan for retirement today. If we are to do away with a single retirement age, we must acknowledge that the individual retirement age becomes the time when people actually need their money back.
So today’s choice architecture is very real and very important. Unfortunately, the financial services industry has a way of interpreting “real and important” as “difficult”. Consequently, instead of striving to make real and important “easy”, they are doing their best to make it “hard” by promoting choice without preference.
This is what the investment pathways do. They choose to help those who are helpless (as in lacking advice) to make decisions on 1-4 (above), without judgement. There is no bias. This kind of choice architecture is leading to 90% of people not getting a pension or annuity while 80% say that this is what they want. When faced with the choice of handing their pot to an insurance company to get a lifetime income, most people say “no thanks”, “not now” or something worse.
The choice architecture of today has to make important decisions real for people but I fear what it does is lay out choices in a way that doesn’t make sense to people who have little or no idea about what these choices really mean.
I am not being insulting to people when I say this, I feel the same way myself, I look for validation of a particular strategy and if I don’t get it, don’t trust myself to make a choice.
Most people when faced with an impossible choice make no choice at all. This of course works nicely for commercial funds who extract rents based on the amount left in the pot (not what is spent).
Wtf…we need to be told to spend our money and how to!
Right now , the choice architecture we are presented with incentivises people not to spend their pension pots but to keep it to pay for later life bills, including the bills we may leave our next of kin if we pop our clogs prematurely.
While a recent Scottish Widows survey told us that 80% of savers want a consistent income that lasts as long as they do, of them around 2/3 said they’d like their family to get the money for the pension paid to them if they died in the early years.
We are developing software that allows people to see the cost of converting pots to annuity/pension and the cost of building in “preservation of capital”. This looks like meaningful choice architecture to me.
But without a burning platform, will people take lifetime decisions? I suggest that there are two ways this could happen.
- Mandation on the saver, the Government enforces a spending plan by a certain age. Even in Australia this hasn’t happened. In the UK, where choice is more highly prized, it looks highly unlikely that Government will mandate pension pots are spent
- Mandation on the provider, this is the route the Government says it will take and we will hear the details in the Penson Schemes Bill.
If providers are required to deliver default spending options that turn pots to pension (a concision of the announcement of the Bill, then the days of the investment pathways are numbered. Fiduciaries, whether Trustees , IGCs or GAAs will be required to offer standard (default) ways to spend the pot.
This makes choice architecture the burning issue of the day, more so even than VFM, pot finding via dashboards and pot consolidation.
It is of course the issue that the pensions industry is least interested in solving, the status quo being commercially more attractive.
But those who give a damn about outcomes of the savings plans we sold in the 1980s and 1990s (and ever since) are determined we get this choice architecture sorted out so people get what they say they want. That is radically different from what they are getting.