Last week it was Richard Smith, this week Johan Kriek, people who find time to think deeply about how members will be served by developments in DC pension outcomes. Here is Johan, I hope to have him at the Pension PlayPen’s coffee morning soon.
The Guided Retirement consultation has a great deal to say about longevity protection.
But how do we decide what protection someone needs without explicitly considering what happens to their pension along the way?
Consider two people who retire at 65 with £100,000. Each plans to withdraw £6,000 a year.
Their investments face the same 25 annual returns, in a different order.
Person A’s pot runs out at 87. They receive 21 full payments of £6,000, followed by a final payment of approximately £4,915.
Person B receives £6,000 every year and still has approximately £53,335 at age 90.
Same starting pot. Same withdrawal plan. Same returns.
Different sequence. Different retirement.
Poor returns early in retirement, combined with withdrawals, can leave less money invested to benefit from subsequent returns. If the member then lives longer, that smaller pot needs to support them for longer.
This is why sequence-of-returns risk and longevity are inseparable.
Now consider what this means for longevity protection.
Person A might have valued protection against running out of money.
Person B, with a substantial pot remaining at 90, might prefer to retain flexibility and access to their savings.
We cannot know either outcome at retirement. Members’ needs evolve.
Yet the proposed single point of consent could cover an annuity purchase years later, without requiring fresh consent. Providers must try to engage members before an irreversible step; members can opt out.
Consent once for an unknowable future. What could possibly go wrong?
Where is the comparison showing that a mandatory longevity-protection feature produces better outcomes than properly governed drawdown, explicitly allowing for sequence risk, across those different experiences?
The Guided Retirement consultation acknowledges investment risk.
The FRC discussion paper acknowledges that investment performance and withdrawals affect sustainability.
But I cannot find an explicit discussion in either paper of sequence-of-returns risk and its interaction with longevity.
Back in 2017 the FCA identified sequence-of-returns risk alongside longevity risk in its 2017 Retirement Outcomes Review.
Almost a decade later, we are designing a new retirement framework that prescribes a feature for the default, while failing to explicitly address a risk that can materially change the outcome.
To present that feature as though it is necessarily the right answer for both members, without demonstrating the comparison, would be disingenuous.
The return sequences and assumptions are in the first comment.
#GuidedRetirement #Pensions #RetirementIncome #SequenceRisk #Decumulation