The report says there are significant risks involved in the generation of retirement income from pension savings, such as investment risk, inflation risk and longevity risk, and that following the freedoms these risks are borne directly by DC scheme members.
The Independent Review of Retirement Income report said:
"When annuitisation becomes optional, that unifying thread is no longer present and there is a real danger that the pension system begins to unravel. At best, it just becomes a tax-favoured arrangement for operating a multi-purpose spending pot – once the money has been spent for one purpose, it cannot be spent on another. At worst, it becomes a honey pot for thieves and other opportunists."
In response, the report has considered whether the industry could "build on the lessons of auto-enrolment by having a well-designed default decumulation process at retirement".
To do this, it says that appropriate products need to be developed offering: accessibility (the flexibility to withdraw funds when needed); inflation protection either directly or via investment performance, with minimal involvement by individuals who do not want to manage investment risk; and longevity insurance.
It argues that currently, no single product meets all these requirements. However a hybrid product, combining drawdown and a deferred (inflation-linked) annuity does, "so a well-designed retirement income programme will have to involve a combination of products".
However it adds that the FCA has refused to grant 'safe harbour status' to any UK investments.
One of its key recommendations is that a ‘safe harbour retirement income plan’ is introduced to allow people to get the best combination of retirement income products for them, given their assets, liabilities, health status, family circumstances, tax position, and risk appetite and capacity.
The plan would be self-started following a guidance or advice surgery, and the plan member has the right to opt out until the point at which the longevity insurance kicks in.
The report has also asked the Government to establish a permanent independent Pensions, Care and Savings Commission which reports to Parliament to ensure that there is cross-party consensus for all future pension reforms.
The report concluded that it is "clear that we are not saving enough for our retirement, so another recommendation is that the Government adopts a national retirement savings target of 15% of lifetime earnings, achieved through auto-escalation, to avoid future pensioner poverty".
Professor David Blake, Chair of the report, commented:
"A great deal of effort will now have to go into re-establishing what a good pension scheme is. This will need a commonly agreed national narrative. Without this, people’s aversion to annuitisation combined with their willingness to pay highly for both flexibility and guarantees could leave them worse off than if they purchased an annuity to begin with. This is a significant challenge. But it is one that is well worth the effort because, as the Pensions Minister, Ros Altmann, says: “pensions are precious”."
Jim Boyd, Corporate Affairs Director of Partnership, added:
“Few people in the UK Pensions sector command the respect, expertise and authority of Professor David Blake. Accordingly the IRRI study which offers valuable insight during one of the most tumultuous times for UK pensions deserves to be taken seriously.
“The principle of compulsion through automatically enrolling people into a pension is supported by all parties as being in consumers’ best interest!
"However, we then expect individuals to manage the bewildering array of choices facing them at retirement which requires consumers to have the combined skills of an asset manager, actuary and financial expert to get a good outcome.
“Fundamentally, pensions are intended to provide an income throughout retirement and ideally should be accessible, inflation-linked and provide some longevity insurance.
“Helping people to make smart choices around retirement should be a priority and the use of a simple decision tree with a limited set of pathways would support those who struggled to make a choice from the myriad of other options. Approved by the regulator a set of ‘safe harbour’ products would – we believe – see more people achieving desirable outcomes."
