Retirement outcomes: The buck stops where?

The objective of the recent Department for Work and Pensions consultation “helping savers understand their pension choices” is to ensure members “have access to support that allows them to make informed decisions and achieve what they want from their pensions”.

What is more, the new rules on consumer duty, though focused on advisory companies, reinforce the emphasis on achieving better outcomes as the endgame, rather than merely complying with a series of rules and processes.

Many employers have gone far beyond adhering to the duties imposed on them. Indeed, some even offer access to fully regulated advice as well as providing guidance.

Early evidence suggests that many people could be making decisions today that they later regret. There is more that can be done to help people better prepare to take these life-changing decisions

A recent Mercer research report suggests that around 15 per cent of the companies surveyed facilitate one-to-one financial advice for scheme members.

But should pension schemes and product providers take on the challenge of delivering better outcomes for their members alone?

What responsibility do members have to make sure they equip themselves with the information they need to make rational decisions? And what is the ongoing role of government in creating an environment that facilitates sound decision-making?  

The influence of behavioural biases

Ultimately, pension scheme members are responsible for the decisions they take, but do they have the knowledge and ability to navigate this complex area?

Most people are not best placed to make economically rational decisions without substantial support.

For example, behavioural biases can have an adverse influence on decision-making. Hyperbolic discounting — the inclination to place more value on a pound today over a pound tomorrow — may lead to people taking more income than is prudent. Data from the Financial Authority Conduct, though imperfect, suggests that this may be happening.

Other influences could also lead to irrational decision-making. Confirmation bias is the tendency to filter information to fit with pre-existing beliefs and attitudes.

The famous George Osborne clarion call that “no one will have to buy an annuity” may have shaped attitudes that are difficult to shift and could account for the rise in drawdown. Confidence bias can give members a false sense of belief in their competence to make rational decisions.

Even without the influence of behavioural traits, people have to make sense of the options they face.

The increasing popularity of unadvised drawdown is worrying. It introduces the need to manage the interaction of a range of risks — withdrawal rates, longevity, investment strategy, inflation and so on.

Many people will be overwhelmed by these challenges and incapable of making the right calls. For example, according to data from Interactive Investor, longevity is often underestimated and, on average, people are making withdrawals at levels that are likely to prove unsustainable, the FCA has said.

Government and regulators can do more

The government and the regulators have an important role to play. There have been successive initiatives to support decision-making at retirement.

For example, changes to the timing, frequency and format of pre-retirement communications — the so-called wake-up packs — the introduction of default investment pathways for people taking drawdown without advice, and the recent introduction of the stronger nudge to channel more people through the government’s impartial guidance service, Pension Wise.

Before June this year, defined contribution schemes were only required to signpost members to Pension Wise. Now, when someone applies to access their pension pot, the scheme must offer to book a Pension Wise appointment — though members can still opt out.

Looking forward, there is the development of the pensions dashboards to build engagement and a new DWP consultation.

Despite this, the data suggests that more should be done. According to data from Social Market Foundation, take-up rates of Pension Wise are low (14 per cent).

Even if the stronger nudge doubles the number of people using this service, most people still will not receive the benefits of using Pension Wise.

The buck stops…

While the ultimate decision rests with the member, responsibility for providing the help and support members need to achieve better outcomes lies with the regulators, scheme managers, trustees and product providers.

Early evidence suggests that many people could be making decisions today that they later regret. There is more that can be done to help people better prepare to take these life-changing decisions.

For example, the government has been reticent to trial automatically booking Pension Wise appointments for people, to overcome inertia and drive up usage levels. 

Few pension schemes provide access to financial advice, despite the availability of financial incentives and the rise of low-cost digital and hybrid advice models.

A great big shove rather than a nudge to Pension Wise, and widespread access to affordable advice, may be the kind of abrupt changes we need to really tackle these issues. Lesser, incremental changes may be too little, too late.

Stephen Lowe is chief marketing officer at HUB Group