Transformation is taking place in the UK pensions system. With the decline of Defined Benefit (DB) pension schemes and the rise of Defined Contribution (DC), liability has shifted from employers to employees, and there is greater uncertainty over levels of retirement income. A savings gap is widely reported and the need to invigorate the level of DC saving in light of the decline of DB was highlighted by the Turner Commission almost 10 years ago, the recommendations of which led to the introduction of automatic enrolment into workplace pensions. As well as the shift to DC from DB, the labour market is changing: people can expect to change jobs up to 11 times during their working lives and the Department for Work and Pensions has highlighted that there could be 4.7 million additional small pension pots generated by 2050. Fragmentation is not only potentially costly to the saver due to fees paid on multiple accounts, but missing and dormant pots can mean people are not aware of all of their savings.

At the same time as changes to the accumulation phase, there has been liberalisation of the decumulation phase. Following attempts to improve competition and outcomes for consumers under the previous regime, Budget 2014 announced a raft of reforms to deliver greater freedom and choice to people accessing their defined contribution pension savings. As the Chancellor, George Osborne, announced: “Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want.” Not only is the structure of decumulation changing, but so too is the shape of retirement. People are living longer and can expect to spend up to 30 years in retirement. Rather than a cliff edge, retirement is becoming a transition process, with more and more people engaged in part time work in the early years of retirement. The decisions taken by retirees are therefore crucial, particularly as they need to factor in costs which may not surface until much later on in retirement, such as paying for long term care.

It is important to consider how consumers will navigate this new landscape, especially due to the growing disconnect between the accumulation and decumulation phases. Automatic-enrolment has harnessed inertia to increase the take-up of pension saving. At retirement, consumers will no longer be bound by strict rules effectively forcing the purchase of an annuity and will be expected to select an appropriate solution for their needs, which will require informed and engaged decision making in face of a wide range of choices.

The Financial Conduct Authority (FCA) has outlined the factors which can complicate these decisions for consumers, including: the complexity of financial products, the risk and uncertainty that individuals need to assess, the potential trade offs between the present and future, the emotional nature of decision making and the lack of opportunity to learn from past mistakes.[1] Research also shows that people want support to better understand retirement planning. A Barclays survey of DC scheme members aged 22 to 65 found that 68 per cent of people needed help with contribution rates and 75 per cent sought help working out their annual retirement income. Yet regulated financial advice is costly and unsuitable for those with small pots. Existing free guidance is high quality, but too generic and limited in its scope. The Guidance Guarantee service (recently launched as Pension Wise), which is being introduced alongside the Government’s Freedom and Choice reforms, will have an important role in supporting engagement and familiarising retirees with their possible options, but it is unlikely to be enough on its own.

There is a strong case for a service to support consumers, as this paper argues, through both the accumulation phase of building up sufficient savings for retirement and the decumulation phase of converting savings into retirement income. This would go beyond the scope of Pension Wise. The FCA’s Interim Report of the Retirement income market study proposed the development of a Pensions Dashboard, to provide consumers with one single platform to view all their pension savings (both state and private). The importance of consolidating information has also been set out by the OECD. The 2014 Pensions Outlook reports that “The value of pension information to the individual is significantly diminished if information only relates to a single plan. Therefore there is an urgent need for combined pension statements that take account of all sources of pensions, including state (public) systems.”[2]

The RetirementSaverService (RSS) would facilitate better retirement planning by supporting savers to see how their current savings might translate into income in retirement and what this means for how much they save, how long they plan to work and their appetite for risk. The Service would do this by bringing together the multiple strands of information about an individual’s assets and sources of income on a user-friendly online service. The RSS would also provide tailored guidance to people approaching retirement. It would bridge the gap between the limited guidance currently provided and regulated advice, which remains unaffordable for most people. The service would help them choose suitable approaches and avoid unsuitable products through a narrowing of choices. The service would be independent and provided in the first instance by the Money Advice Service, building on its existing operations in this space. The Service should look to international examples for its development, including MinPension in Sweden and the Pensions Dashboard in the Netherlands.

The pensions revolution taking place is transforming the landscape for consumers, who face complex and difficult decisions. The RetirementSaverService would support consumers to make these decisions and deliver better outcomes for their retirement.

[1] Financial Conduct Authority (2013), Applying behavioural economics at the Financial Conduct Authority, Occasional Paper No.1.
[2] OECD (2014), OECD Pensions Outlook 2014.



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