Can the industry help people make better decisions for their income in retirement?

The Future of Pensions and Retirement Income May Sometimes Look Bleak but There Is Reason to Be Optimistic

EValue recently hosted a lively discussion with a number of industry experts to discuss the future of retirement options, given that consumers have differing expectations (and understandings) of saving for the future, and feel just as perplexed about their options for retirement. We also discussed a number of areas where the industry needs to improve the advice offered to those taking income in retirement.

Recent research we conducted found that consumers want choice, but they also want to know their income is going to last for a lifetime: 63% of adults with a DC pension want a flexible income in their retirement.

Most of them want flexibility and to respond to changes in their life:

• But only 30% of them will go into income drawdown (in practice many go into income drawdown inadvertently)
• 57% of people who say they won’t go into income drawdown want a flexible income
• 42% of people are unlikely to go into drawdown as it’s too complicated or they don’t trust investment markets.

Exacerbating this is a gap in how the market is serving savers:

• A third of people don’t know how much they even have in terms of their retirement pot
• 40% of people don’t know how to translate their pension into an income
• 44% don’t feel able to reach out for advice — due to perceived high cost, and a lack of knowledge around how best to seek advice
• 43% worry the advice would be compromised in some way — that advisers won’t have their best interests at heart.

This lack of trust was echoed around the table by the experts present:

Holly Mackay, CEO, Boring Money — “People are taking their money out of pensions because they don’t trust it being held in a way they feel is remote. People don’t think of pensions to be as accessible as their other investments. Most people initially don’t understand what advisors do. However, once people see financial advisers, they’re happy with the service — it’s taking that first step.”

Chet Velani, CCO, EValue — “If people keep their money in cash, it’s effectively the same as leaving it under their bed! Although their money may be ‘safe’, they will lose out on benefits of higher real returns from the long-term exposure to other asset classes such as equities and property. Equally important, however, is having an asset allocation which works well for decumulation. This needs to be very different from a typical accumulation asset allocation strategy. For accumulation, volatility is an opportunity because of “pound cost averaging”. In decumulation, the absolute reverse is true, volatility can lead to what is called “pound cost ravaging”. A poor investment strategy will reduce the number of years an individual can take income for, adding to the suffering for many associated with a suboptimal pension pot size at retirement!”

Andrew Storey, Proposition Director, EValue — “Even if people have sufficient money, they don’t know what they should do with it. The more freedom you give people, the more they fear they will do something wrong — because it’s complicated and even people working in the industry struggle to get it right sometimes. The level of money changes the scope of the problem. But people need access to advice and the good news is that digital advice will allow many more people to access advice economically both at and in retirement”.

Natalie Flood, Associate Director, Fidelity — “’How much money do I need?’ is the question we get asked by consumers the most frequently, and we need to help them earlier — and engage them earlier. We need to inform consumers at the right time. Then at retirement the question becomes ‘what are my options, and which is best for me?’”

However, there’s huge opportunities in the industry to improve outcomes for consumers and also to create profitable post retirement wealth management businesses. While there are more guidance tools available than ever before, many are systemically flawed and produce over optimistic forecasts. Savers need support to find the right ones for them; the ones they can trust and the ones that are engaging and relevant. For instance, EValue launched a digital assistant to help people consider when their retirement income might run out against their life expectancy — See WhenWillMyPensionRunOut.com

When it comes to advisers, there are also more planning tools available and technology can be used to improve their productivity and well as the quality of advice they can offer. This includes

• More sophisticated cashflow and forecasting software to ensure realistic expectations are set when drawing income from capital over a long period into the future
• Ensuring asset allocations take full account of the risks and returns and how they change over time when seeking to deliver an income from a pension fund
• Understanding the trade-offs between securing a guaranteed income instead of flexible income, both at the outset of retirement or at a later stage.

Advisers need to undertake due diligence on the solutions they use because many of those available in the market are flawed. They should ask providers whether their tools take account of sequencing risk and the risk of “pound cost ravaging”. If purchasing a guaranteed income is envisaged at some future stage, advisers should satisfy themselves that retirement income forecasts are based on a sound interest rate model producing realistic forecasts of bond yields on which, of course, the price of annuities are based.

For those who cannot afford more traditional face to face channels, there is a market for regulated, automated digital advice which delivers personalised recommendations. This will potentially serve a meaningful segment of the population.

The workplace was seen as the place people might most naturally expect to get help — from their employer both when saving for retirement and when deciding how to use the proceeds of their savings when contemplating retirement.

With only 26,000 independent financial advisers available, technology can play a crucial role in helping more people. At EValue, we provide technology that allows our adviser clients to tailor advice to each person, no matter what their needs and future requirements — giving savers an accessible human element at the front, backed up by expert technology to inform decisions at the back.

When it comes to how people can be encouraged to save more for the future, there was a strong vote around the table for helping consumers to understand when it was sensible to take more risk with their investments. Even for savers who are risk averse, the balance of risk between short term fluctuation in assets and longer-term returns for different investment options is crucial to understand. Longer term asset and cashflow modelling can powerfully bring this to life but must be communicated in a personalised and relevant way to each individual.

Holly — “We are being negligent to people by not telling them to take risk when this is appropriate.”

Natalie — “Workplace lifestyles have a longer de-risking period because people are now more likely to take cash aged 55. There’s so much uncertainty about what pensions will look like. Now we see higher risk multi-assets, then starting to move to a rower risk asset, then moving into cash. We can no longer rely on a ‘one size fits all’ investment strategy.”

In concluding our discussion, we were not sure whether to feel pessimistic or optimistic about the future for those facing retirement or the industry response to support them. It’s easy to say that the dilemmas for consumers and for the industry are daunting, but at EValue we firmly believe that there are great opportunities for the industry starting with early engagement, trust based adviser relationships, digital advice and backed up by the right technology delivering consistent guidance and advice messages however consumers choose to access decision support. Putting aside the pessimism about the difficulties, it is clear that there is a desperate need for consumer-focused solutions. The technology and knowhow exist so there is a clear business opportunity to be grasped.

To find out more about EValue, the findings our research uncovered, and how we’re helping clients and consumers save better for the future, click here.