The UK pensions industry must learn important lessons from defined contribution (DC) models around the world, in order to improve outcomes for savers.
Speaking in a session at the Pensions and Lifetime Savings Association’s (PLSA) Investment Conference in Edinburgh, Chris Lyon, head of DC at Goldman Sachs Asset Management, said that while the US market has helped consumers save decent sized pots, “there’s an increased focus on moving beyond the accumulation phase”.
He said that “dramatically more” people should take advantage of insurance and other types of retirement income solution than currently do.
“There are so many things you insure in your everyday life, but we don’t have longevity insurance in most people’s retirement accounts,” Lyon said.
“Trying to find ways of bringing that in, but also making it more user friendly, is where the marketplace is going and not just in the US.”
Alison Leslie, head of DC investment at Hymans Robertson, said the defined benefit legacy has made the UK into a “nation that is looking for certainty in that income”.
Leslie drew comparisons with US and Australian consumers and said there needed to be “a bit of a cultural shift” in the UK, away from a savings mentality to one of investment.
Technology and digital
As pension schemes are being asked to become more comfortable with private assets, that adjustment needs to extend to decumulation in assessing just how much risk to take, and how much we want to damp down volatility.
But it is technology where the UK can learn most, said Leslie, particularly from Asia, where technology is more integrated in financial services.
She cited Singapore’s development of a digital ID verification mechanism that allows consumers to access their financial products in a seamless manner.
“We’ve got open finance [in the UK], and that’s building,” said Leslie, “but we’re not quite there. There’s still a lot of work that needs to be done to actually get that to a really good place.”
Jesal Mistry, head of DC investments at Legal & General, said that problems of decision making at the point of decumulation are not only connected to financial literacy, but compounded by it.
The complexity of at-retirement decision-making meant people may shy away from choosing what to do with their pots, Mistry said. He added that a third of members don’t touch their pots until they reach their seventies – in part because they are unsure about making decisions.
Applying digital infrastructure to support the decision-making process will also determine exactly what consumer want to do and remove the uncertainty that prevents providers from building the right investment solution, Mistry explained.
“We’ve all spent millions of pounds on education over the years and got absolutely nowhere,” he added. “If we can get that piece around engagement, then we can start to build that.”
Claire Felgate, head of international consultant relations at Goldman Sachs Asset Management, said engagement alone was not enough to prevent consumers sleepwalking into retirement. She argued that auto-escalation could deliver “unbelievable outcomes” for savers.
“I’m not saying that people should really suffer in order to save their pension,” said Felgate, “but you can get people to a much better outcome without them actually having to do anything.”
