Talking Head: Nest's Mark Fawcett shares the scheme's initial consultation findings on the needs of DC members and highlights six areas that could inform the design of default retirement products.
But not all will have the confidence or experience to choose how they want to turn their savings into a retirement income.
Understandably this could lead to outcomes that may not be quite right for them and may even be damaging to their long-term financial situation.
How the industry meets the needs of the DC generation is an ever-more crucial question.
Our recent consultation – The future of retirement: A consultation on Nest's approach in a new regulatory landscape – looked at what savers may want and need when it comes to these big choices about retirement and how the market could respond.
Before Nest dives into the details of what good looks like for its members in the longer term, we felt it was important to share an emerging consensus on the needs of DC savers from the evidence and discussions we have had so far.
The challenge is not just to create a path of least resistance that will deliver the minimum detriment. Rather, the task will be to create solutions that work best for most people most of the time
This emerging consensus shows that positive consumer outcomes could be largely determined by the design of good retirement pathways, to take people from saving to drawing an income in a way that most meets their needs.
There is strong agreement developing that for some consumers, this will be a default path of some description.
The challenge is not just to create a path of least resistance that will deliver the minimum detriment. Rather, the task will be to create solutions that work best for most people most of the time.
The evidence seems to be suggesting good defaults are likely to need to have some fundamental features in common.
Of these, the two primary factors that stand out will be the ability to provide flexibility while managing the risk of people running out of money because they have underestimated their life expectancy.
From the responses we have had to our consultation, alongside evidence from other organisations, six principles emerge that could inform the design of default retirement solutions for DC-dependent savers:
Living longer than expected and running out of money is the key risk in retirement and a critical input into retirement income solutions;
Savers should expect to spend most or all of their pension pots during their retirement;
Income should be stable and sustainable;
Managing investment risk is crucial as volatility can be especially harmful in income drawdown-type arrangements;
Providers should look to offer flexibility and portability wherever possible;
Inflation risk should be managed but not necessarily hedged.
These are simply the preliminary findings from our consultation, which is just one aspect of a sector-wide effort to help ensure savers’ needs are met.
Nest is one of a number of pension providers, industry groups and consumer representatives seeking to approach the challenges and opportunities presented by the reforms and we hope that this is a helpful contribution to that debate.
Mark Fawcett is chief investment officer at Nest
