4. Helping people manage pension wealth in retirement
People managing defined contribution pension pots face too many complex decisions over their (often numerous) pension pots. They risk either running out of private pension wealth later in life or being overly conservative and not enjoying the fruits of their savings. This is a huge problem and an immensely difficult one. The Review proposes:
- Expanding the automatic consolidation of small deferred pension pots, especially for those approaching (or above) the state pension age.
- Facilitating and encouraging flexible but protective default retirement income products, such as ‘flex then fix’ approaches combining the flexibility of ‘drawdown’ earlier in retirement with the security of annuities (which provide a regular income for life) at older ages.
- Ensuring people can access high-quality information and support without having to pay for expensive and ongoing financial advice, along the lines of the Financial Conduct Authority’s recent proposals for targeted support.
Industry reacts
Paul Johnson, director of the IFS and co-director of the Pensions Review, said: "There is much to celebrate about the current UK pensions system. The current generation of retirees is, on average, doing much better than any previous generation. Pensioner poverty is way down on the very high levels in the 1970s and 1980s, and is indeed below that for other demographic groups. The state pension has been simplified and is now much more generous to many women than in the past. Many more employees have been brought into workplace pensions by the successful roll-out of automatic enrolment.
"But there is a risk that policymakers have become complacent when it comes to pensions. Without decisive action, too many of today’s working-age population face lower living standards and greater financial insecurity through their retirement. Our recommendations give government a clear and affordable roadmap: shore up the state pension, help workers save more – but only in periods when they are better placed to do so – and help individuals to make the most of their pension pots through retirement. Taken together, they would create a pension system fit for the next generation."
Rory Marsh, workplace pension director at Royal London, commented: “The report’s findings are a timely contribution to the conversation to improve retirement provision, especially as the Government will shortly publish more details about its own review of retirement adequacy.
“The report rightly identifies the crucial role that workplace pension schemes play to support people in saving for their retirement, and the importance of the employer-employee partnership. The Government’s review should provide a clear direction of travel for future contribution levels so that businesses and workers have a greater degree of clarity and certainty to help plan their long-term savings.
“This report also emphasises the need for targeted support to bridge the gap between guidance and advice so more people access the support they need when it comes to saving for retirement. This is something we are keen to advocate for, so people are able to make better informed decisions at key life-stages.”
Glyn Bradley, IFoA pensions board chair, said: "One focus for the IFS is the role of auto-enrolment which uses employee inertia to drive up pension scheme membership and minimum contribution levels but also provides employees with the freedom to opt out. Opting out to increase immediate take home pay can mean these employees are losing both tax relief and their employer contributions because they cannot afford to save.
"Where people can afford to save more, their current defined contribution (DC) rates may be misleadingly low for the retirement they expect. A nudge for higher earners to contribute more will help narrow this pensions gap.
"We also need to help people use their savings well, and that includes managing the uncertainty of how long they will live. Annuities will have a part to play, but the Government should focus on enabling other choices for UK savers including through multiple employer and retirement-only collective defined contribution schemes. There is urgency to make sure these options are available when schemes think about their guided retirement duties under the pension schemes bill currently in parliament, which will be coming in the next few years.
"Advice and guidance can give people more confidence with their savings. We would like to see policy makers and the industry exploring ways to make it easier to pay for advice out of savers’ pension pots.
"The IFS recommendations also consider the role of the pensions triple lock. We share the concern that increasing state pensions over the long term faster than both earnings and inflation, is at odds with almost every other area of state spending.
"The triple-lock is often described as providing protection, but we need to consider whether its indefinite escalation is the best way to protect those in need of support across all generations. A long-term approach would be to set out what the affordable level of the state pension should be and how to maintain that relative to prices and earnings. This should help all members of society have confidence in the long-term sustainability of the state pension and the base that they can build their retirement planning on.”
Mike Ambery, retirement savings director at Standard Life, added: “Pensions are firmly in the spotlight at the moment. In recent weeks we’ve had series of major policy announcements that have set a clear direction of travel on the investment aspect of the system and a drive for fewer, larger schemes. The broader question of how we ensure people have enough to live on in retirement and receive the help they need requires further focus and the IFS paper, alongside the expected adequacy review from the government, will move this conversation on.
“The report correctly identifies widespread under-saving and gaps in pension provision. We are supportive of their conclusion that there is not a one size fits all solution to these problems but there is a need to be more inclusive, particularly for the self-employed, as well as for younger workers who are not yet included. The risk of over saving for those on low incomes is significant but so too is the need for most of those on average or higher earnings to save more. Striking the right balance will be a key challenge of the adequacy review, and any change would need to be carefully considered and in consultation, especially with employers.
“With the state pension accounting for a significant proportion of all welfare spending, the report highlights the risk that the state pension age could be pushed back further to maintain affordability. We agree that there are issues here and people’s ability to keep working haven’t necessarily kept pace with increases in state pension age, as evidenced by the rise in poverty levels among those in their early 60s.
“The report recognises that many aspects of the pension system design are moving in the right direction, with plans afoot to help consolidate small pension pots and reduce the complexity of decisions people face at retirement in particular. We see the need for a joined up approach between Targeted Support and default retirement income options as particularly important, as together they have the potential to reduce the anxiety that many people experience around making the wrong decision at the point of retirement. Targeted Support will also give individuals support in recognising that they might not be saving enough.
“The discussion on how default retirement income solutions will be designed is just getting going but we agree that these need to meet people’s twin need for a degree of income certainty and flexibility. This also recognises that decisions when not supported can sometimes have life-changing implications. We look forward to a long-awaited review of retirement provision, aligning with ensuring decisions in saving and spending provide support and guidance for both secure and better retirements through an integrated public and private retirement system.”
