Analysis: Workers risk missing out on optimum retirement savings by not supplying their workplace pension provider with an intended retirement age, experts warn. But in the age of inertia, what can be done?
After Money Saving Expert founder Martin Lewis urged savers last week to update their retirement age or risk losing thousands, consultancy LCP confirmed to Pensions Expert that defined contribution members were not notifying their providers of changes to their planned retirement date.
Research conducted by LCP found that only 20 per cent of 3,000 savers had retired at the age selected on their default, and only 5 per cent had selected a different retirement age from their default since 2016.
Head of LCP’s defined contribution team Laura Myers said: “Since freedom and choice, we’ve been working with our DC clients to analyse when and how members are taking their pots to help design better communication and investment decisions.”
We can’t just say that this is a problem for the trustees or the pension industry. If you haven’t created that larger ethos and culture around saving and investment it would be really difficult for a company or a trustee or pension provider to just create that awareness themselves
Girish Menezes, Premier Pensions
The consultancy found that two-thirds of the retirees accessed their pot before their scheme’s default retirement age, meaning their pension pot could be derisking too late. The remaining 13 per cent accessed their pot later than their set retirement age, in turn taking too little investment risk.
Ms Myers predicts the prevalence of accessing retirement pots early will decrease as DC becomes people’s main pension and the 2015 freedom and choice reforms that allows savers to access their pots with increased flexibility has fully bedded in.
“But the risk of members taking their pension at the wrong time remains, and it is something I recommend my clients remind their members about, particularly how making this decision changes the investment risk profile of the default,” she said.
Make it easy for members
Darren Philp, director of policy and communications at Smart Pension, encourages providers to build a sensible default so members can easily log in and make any necessary changes, adding that recording savers’ expression of wish and retirement age would tackle the issue.
“At Smart, our approach is to make it as easy as possible for people to sign up and get to know their online account, which is accessible via a website or an app. Within that there are checklists and prompts that encourage people to complete basic tasks.
“While auto-enrolment has been great at getting people into saving, the fact that everything is done for them means that people think they don’t need to do anything for their pension, which is not quite right and can potentially lead to issues down the line,” he said.
Commenting on how saving outcomes could be affected by not retiring on the default age set by the provider, Mr Philp described it as something akin to a lottery, as people could in fact gain from taking on more or less risk depending on the economic and investment conditions at the time.
Providers have limited impact
Premier Pensions Management head of administration Girish Menezes agrees with the need to broaden savers’ understanding of how their pensions work, so informed decisions on issues such as retirement date can be made.
“I think people like Martin Lewis are in fact doing an excellent job using mass media to make members realise that their pension is important – they cannot just rely on the default age or the default investment and they do need to take that responsibility to review their arrangements”.
Government must revise AE or ‘risk leaving a whole generation behind’
While auto-enrolment has added more than 10m employees to a workplace pension scheme since 2012, experts say it is still not enough to ensure adequate levels of saving towards retirement.
Mr Menezes recommended DC members complete a ‘health check’ of their pension at least once a year as they near retirement, highlighting that although pension providers could do more to engage members, savers are responsible for reviewing their arrangements and ensuring the information providers have is correct.
“We can’t just say that this is a problem for the trustees or the pension industry. If you haven’t created that larger ethos and culture around saving and investment, it would be really difficult for a company or a trustee or pension provider to just create that awareness themselves.”
