I’ve recently asked that pension people elevate their think to “consumer level”

To most people, the pension they’re thinking is the income that’s available when they think they’ll need it or the date they can retire because their income is sufficient. It is not more complicated than that , no matter how complicated we make our apps to answer questions that most people do not ask.

Once the simple question that people asked is answered, there is a next steps question which is how to get paid a pension, an income that is a wage in retirement. The good people of the institute of actuaries and BIT have done some thinking about this and have worked out there are good ways and bad ways to do this.

So what is being said? BIT are behavioural scientists and IFOA are pension experts, together they set out to use a deep understanding of human behaviour to design interventions that solve your real-world problems. BIT claims to

work closely with clients like the IFOA, and bring together everything we know from behavioural science with human-centred design and co-design methods.

The IFOA sent me the report (thanks Glyn Bradley) because they know this blog’s strapline is “turning pots into pensions”.

What do they find works (and doesn’t) ?

The central finding is that any design element requiring active member engagement in later life is at serious risk of not being acted upon.

• Drawdown assumes sustained pension engagement throughout retirement, including at ages when cognitive decline is prevalent.
• Annuity assumes irreversible acceptance of the package, which seeks to address concerns regarding underestimating life expectancy
• Flex and fix would usually assume that a second decision, converting residual savings to secured income, actually gets made.
• Retirement collective defined contribution relies on trust in a mechanism that is new not just to members but largely to the UK industry. That trust must survive income cuts, and the design’s asymmetry makes this demanding: a cut is experienced as a concrete, attributable loss, while the benefit, protection against outliving one’s savings, is never experienced as an event and guards against a risk members already underestimate.

I think the conclusion is that there has to be a better way for pension experts to help pension nit-wits than telling us nit-wits how to do it for themselves.

I quite agree but what does this mean in practice? Well quite obviously behaviourally is that what works is being nudged into defaults. That’s the story of the success of auto-enrolment. Offering no retirement guidance by way of a nudge down a pathway which is the only way if you don’t opt-out.

What are the pathways that BIT and the pension actuaries conclude as “good”

The two designs that can deliver longevity protection without betting on an active member decision in later life are flex and fix, provided the fix is automated or defaulted rather than optional, and retirement collective defined contribution, provided member comprehension and trust can be established and maintained.

The conclusion of the report makes sense to me – less than two months from my 65th birthday.

The report recommends that defaults should be designed so that the do-nothing path leads to a defensible outcome at every age.

Communications should be framed around income needs rather than pot size, and tested rather than assumed to work.

The lump sum decision should be tested as part of income planning. Schemes should adopt minimum viable segmentation using simple proxies.

Government and regulators should attend to the trustee’s decision environment as deliberately as to the member’s.

Without safe harbours for well-evidenced defaults, the trustee dilemma will resolve itself by default: towards flexibility, the option that feels safest to trustees but that unengaged members cannot use.

It is that final paragraph that should be hammered as a poster on the door of every trustee boardroom. If we do not make it plain to people what is going to happen to their pot, they will have the flexibility that most people do not want– I fear it, so do my Friends who I talk to – who are my age and who have worked all their lives..

The tax free cash will do me, the income is what I get paid, my wage in retirement and that can only come from collective pensions or from drawdown and eventually an annuity.

That is where DC workplace pensions are heading.   People will abandon the “dream freedom” offered; – they want instead deferred pay for the years that they have taken a pay cut