By Karen Brolly, Head of Products at Hymans Robertson
In the meantime, having worked closely with a number of workplace pension providers and retail firms offering Pathways, we’ve identified four areas where a change in approach could provide even better outcomes for consumers:
Structure – the rules as they stand today, provide a strong framework for helping non-advised customers achieve better outcomes in retirement. In particular, the feature of a default investment strategy aligned to a particular customer goal with a robust governance oversight framework is a strong model. However, the four different options coupled with a set five-year time horizon could be evolved to provide a more relevant and engaging set of options for consumers.
Uniformity – ensuring people achieve a basic level of understanding of how a Defined Contribution (DC) pension works is a high enough hurdle for providers to meet, and for individuals to achieve. As well as their State pension, some people will also have a Defined Benefit (DB) pension as well. When looking at DC pensions, where many individuals will have more than one pot, having different requirements for contract-based pensions relative to occupational pensions is an unhelpful extra layer of complexity, making understanding and decision making tougher for those who have both. A uniform approach for Pathways should be applied across occupational pension schemes as well as contract-based schemes to make life easier for members of both arrangements.
Communication – the bar is set too low for what a suitable level of communication is for providers to give consumers. Fundamental requirements which all consumers should be able to expect is for communications to be personalised, with outcomes focused projections and 24/7 online access to current information. The introduction of Pension Dashboards will make this gap even more obvious and harder to justify.
Engagement – a more pro-active approach to engaging with customers pre and post going into Pathways is required. There are two issues that need to be addressed:
Inertia - It is important to consider how the decisions at retirement are presented. The choice between going into full drawdown and opting for Pathways or remaining invested in pre-retirement strategies can be significantly impacted by this. Customer journeys and touch points should not be a barrier to making a decision around whether to remain invested in your pre-retirement strategy or move to Pathways.
Situation drift - especially for those using Pathways for regular income drawdown, a whole raft of potential personal or market related changes can affect suitability of a decision you may have made up to five years before. Using well designed ongoing nudge communications to keep consumers aware will help deliver better outcomes than a more minimalist “hands off” approach.
Non-advised customers in income drawdown run a number of risks with significant potential financial implications. Pathways, if designed, implemented and governed well can provide a solid solution to help consumers without access to a financial advisor manage these risks and achieve good retirement outcomes.
That should be the goal of regulators and the industry and we look forward to the next phase of Pathways ahead.
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