Many words have been written about how to solve the puzzle that is ‘at retirement’ in defined contribution (DC), especially in an environment where we are relying on inertia and defaults to get people saving. We know that outcomes can only be maximised where people engage and make some decisions, but how do we encourage, facilitate and help that decision-making process, when we know savers find it difficult and confusing.
Pension savers face a number of challenges today, particularly when it comes to converting their savings into a retirement income. Far fewer people now have defined benefit (DB) pensions, so need to make active decisions about their retirement savings if they are going to make the most of their pension savings.
Pension freedoms have increased the choices available, and have opened up the space for product innovation. But, all too often savers say they are bewildered by the options available, and there is often a lack of guidance or advice options to help members through this process.
Financial advice is the usual go to, especially for people with larger pensions, but is seen as prohibitively expensive for the vast majority of savers. And while many pension providers offer self-serve tools and guidance, these can be complicated with communications mired in pensions jargon and compliance-focused risk warnings.
We saw there was a gap to develop a simpler and more intuitive service that responds to these real world needs of savers. Particularly for those in what we call the ‘sandwich layer’ – those who don’t have sufficient pension savings to make advice a cost-effective option, but whose savings are large enough that it doesn’t make sense to simply switch into cash at retirement.
Our Future of Global Retirement report found pension savers in the UK — like those in the US and Australia — want to take control of their own finances. People want to be able to engage digitally, having easy and flexible access to their pension savings and a better understanding of their retirement options.
Part of the problem to date has been that the pensions industry has assumed those with reasonable pension savings also have a high level of financial literacy. This is not always the case. Surprisingly, nearly half of adults in the UK (47%) said they have never received retirement advice*. When this is considered alongside the fact that 39% of the population say that they don’t understand the options available to them at retirement*, the possibility of maximising their retirement income with such limited knowledge becomes incredibly difficult.
We’ve tried to bridge this gap by designing a product that challenges some of the conventional wisdom around how people take their pensions money, and rethinking the way we talk about pensions, retirement and the tools we use.
At Smart Pension we’ve developed Smart Retire which we launched earlier in the year and is now being used by some of our members. Smart Retire provides the user with intuitive digital guidance and modelling, to give them confidence and control. So they can plan for and manage their pension savings, both in the lead up to and during their retirement.
It offers a ‘pot strategy’ which helps people think about their pension in the same way they think about their savings and income during their working life. We spent more than two years developing Smart Retire, focusing on research and testing potential approaches on real people to refine the way it works.
Rather than forcing our members to take out a range of different plans when they want to access their pension savings, such as annuities or drawdown, they have a single plan. But within this they can have different savings pots. At its most basic there is a flexible income pot, to manage their transition from work to retirement, and a later life pot, which is essentially putting aside some savings to provide an income from a later date.
But there is also the option to add an inheritance pot, or a rainy day savings pot. This approach helps savers think about how they are going to use their funds in retirement, and to better understand where potential shortfalls might be.
This is a flexible strategy allowing people to reallocate funds between different pots should circumstances change. This flexibility is critical because retirement is often a gradual process, not the cliff-edge it once was. Just 16% of savers still consider retirement as a single event – a startlingly low proportion. Retirement is seen by 45% of people as a process, while almost a third plan to continue working into ‘retirement’*. There are also default investment strategies underlying each pot which vary according to the overarching purpose and objective of the particular pot.
Smart Retire allows members to move seamlessly from the accumulation to the retirement stage without having to switch providers. As the decumulation option remains within the master trust structure, savers will continue to benefit from the oversight of professional trustees into their retirement. Trustees will review issues like the default investment strategies at regular intervals to ensure they continue to deliver the desired outcomes for members.
Consultants, advisers and employers are now starting to focus far more on the at-retirement options a workplace pension scheme can offer members. With a renewed focus on member outcomes, at-retirement is becoming an important part of the jigsaw and one of the features that should be considered when switching or setting up a workplace pension scheme. We have definitely seen more of an emphasis on this in our new business conversations, particularly from single employer trusts looking to switch to a master trust structure.
Employers and trustees are starting to think beyond accumulation, and look at what a receiving scheme might do to help their members when they reach retirement.
Without an effective at-retirement strategy there is an increased risk of value destruction, through members making the wrong decisions, or simply not making any decision at all.
Please note: Smart Retire is one of a number of options available to members of the Smart Pension Master Trust when they reach 55 years of age. Learn more about Smart Retire.
*Data sourced from our independent research: The Future of Global Retirement report which presents findings from more than 6,000 savers across the USA, Australia, and the UK. To discover more on how savers think about retirement, read our The Future of Global Retirement report.