By Clear Path Analysis
A report by leading pension experts in the UK highlights the failure of the industry to help retiring workers maximise their retirement income and argues that those who do not offer appropriate guidance are failing in their duty of care.
Given the shift from defined benefit (DB) to defined contribution (DC) pensions, hundreds of thousands more people are going to be retiring [from DC accumulation] in future years. This has suddenly put a spotlight on the issue. Members not considering all of their options as they approach retirement and who are no longer under the care of trustees, risk the benefit of all of those years of controls and processes being wiped out overnight.
These are some of the latest conclusions from a Clear Path Analysis report‘Preparing Pension Members for Annuities’ published today.
Graeme Riddoch, Director at The Open Market Annuity Service, wrote of his concerns for members: “Failure to help our retiring workers maximise their retirement incomes is a national scandal, one which ultimately costs us all in terms of lost tax and higher benefits payments. Trustees and Employee Benefit Consultants (EBCs) are the gatekeepers to a better future. The solutions are here today, but they need to be deployed in the corporate pension space if our retiring workers are to look forward to a better tomorrow”. Evidence from a Department of Work and Pensions report on trust and confidence in pensions and providers suggests around twice as many people trust their employer to ‘act in their best interests’ than trust either the government or financial services industry.
Reflecting on behavioural researchDavid Harvey,Director of Corporate Pensions Development at Partnership Assurance, adds: “People will arguably do what they are told or follow the path of least resistance because they do not know better.”
At a time of depressed annuity rates and rising life expectancy, Graeme believes: “Retirees really do need all the help they can get. Currently, hundreds of thousands are missing out on billions of pounds of income over the duration of their retirement”. The Pensions Income Choice Association (PICA) which commissioned independent research into the issue has put the potential gains from better retirement decisions at £3.3 billion over the next 20 years.“This has prompted key players in the advice and retirement income market to demand a major rethink of the Open Market Option (OMO) in order to encourage more people to ‘shop around’ for an annuity.”
Speaking forDC occupational scheme members Peter Gould, Annuity Development Manager at Canada Life, suggests retirees need to consider how they you save before retirement and thenwhat to do with the pension fund to provide an income.
Speaking on the role of trustees, David Harvey, states that they have a clear responsibility to help members with their annuity decisions:“From the evidence we see, trustees need to be urged to do more, issuing clear calls to action to members and strongly encouraging them to ‘shop around’ when they reach retirement as opposed to rolling over into whatever is presented to them. Issuing more information to members is not enough, a firm nudge is required. Trustees need help and support in offering the appropriate guidance if they are to avoid failing in their duty of care.”
One aspect to think about is the disproportionate amount of time and attention focussed on the accumulation phases of a scheme lifecycle compared to that on decumulation. David adds: “Most of the effort, governance and fees have been directed for many years now at... communicating the importance of joining the scheme and paying enough into it”. He goes on to point out: “The Pensions Minister said three or four months ago, that just taking an open market option can add about 20% to your pension. Whilst it is accepted that 40% of retirees would qualify for an enhanced annuity nowhere near this number actually are, despite the fact that it can lead to increase in their pension of a third or more. The decisions that members are going to need to make around annuity choices need to be introduced earlier into the piece, not just six months out or even less.”
Given that hundreds of thousands more people are going to be retiring – typically only 2 to 3% of scheme members are currently retiring annually – that suddenly puts the spotlight on the issue.
Currently a third of members look around and go elsewhere, a third look around but stay where they are and a third just don’t bother doing anything at all. Peter doesn’t believe a single action can significantly improve take up rates: “A combination of better and simplified communications, better processes combined with the education of the member, will help increase the rate by helping to overcome the general feeling of apathy that exists when some members need to make this important decision. The member must also be told of how and where to get financial advice and be aware that looking for this help will not necessarily ‘cost’ them financially.”
Considering options available to those providing corporate pensions, Graeme remarks: “The good news is that we are on the cusp of a revolution driven not only by political and regulatory heat, but also by the arrival of new platform technology that will allow increasing numbers of retirees to scour the market for better deals”. Platforms enable retirees to take control of their own decisions, by giving them easily-understood information on retirement options such as inflation-protection, dependants’ pensions and death benefits, along with true whole of market, real-time, annuity quotes. It focuses on helping them select the right type of annuity and then finding the best rate available. The data equals that available to IFAs and allows retirees to opt in to full advice if they wish.
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