The Pensions and Lifetime Savings Association (PLSA) recently released its Hitting the Target – a vision for retirement income adequacy paper which made for interesting reading.
The findings suggest a programme of reform over the coming years to help deliver a framework of well-governed, good value products and services that support savers to make effective decisions and achieve better outcomes.
The paper paints a fairly bleak picture of people’s understanding of pensions and how few are actually on target to achieve an adequate retirement income. PLSA estimates only 3% of defined contribution (DC) pension savers are on track to achieve their ‘target income replacement rate’ in retirement.
Furthermore, this is against the backdrop of younger people owning less wealth in the future, with fewer being able to access the housing market, and the same group facing higher costs in retirement through ever-increasing longevity. In the absence of defined benefit (DB) pension schemes, the challenge to achieve adequate retirement income is undoubtedly significant.
Blocking it out
The paper makes a number of sensible and interesting suggestions but for me, ignores one key area that is already proving an effective way of helping people achieve quality retirement outcomes. I’ll come back to that later but let’s first look at some of the proposals made.
Given the title of the paper, Hitting the target, the first proposal to be implemented in 2019 is to tackle the 77% of savers who don’t know how much they should save. The PLSA aims to create a series of easy to understand targets which it hopes will increase savers focus and understanding of what they need to achieve and encourage increased saving.
Clearly, having a series of targets could cause some confusion and it’s unlikely any will be exactly perfect but the idea of a target is a sensible one. It is also easier to predict your required retirement income the closer you get to retirement so people should be encouraged to review and challenge the targets they have set on a regular basis.
The paper looks at the success of auto-enrolment (AE) and not surprisingly highlights the inadequacy of the current contribution rates and those people who do not participate in AE, most notably the self-employed.
The paper suggests an increase in scope for AE and a gradual increase in contributions from 2025-2030 from the current 8% minimum to 12%, perhaps with a 50/50 employer/employee contribution rate. It should be remembered that 2030 is 12 years away and 12 years of inadequate pension contributions will likely create a shortfall that is very difficult to close.
The paper also looks at improved scheme governance, particularly in the decumulation phase, helping people to work longer who need to supplement their retirement income, improved engagement through the pension dashboard and making it easier to access housing wealth to provide retirement income. All sensible suggestions.
Hold on
The final proposal in the paper is for ‘guided at-retirement decisions’ and this is the area where I feel the paper is lacking. The paper does rightly point out the need for pre-retirement engagement as at-retirement can often be too late. It also rightly recommends a referral to the SFGB (Single Financial Guidance Body) prior to a pension withdrawal.
It then goes on to suggest signposting to a range of suitable products and this causes me some concern as we are back to trying to pigeonhole people into a particular box and that isn’t the way to achieve good retirement outcomes. Everybody’s retirement will be different and a more personalised approach is needed.
In a ‘guided sign-posting’ world, it is still too easy for people to make the wrong choice which can be a very costly mistake. What’s more, can this approach effectively help people who need a combination approach and those who need to adjust their retirement income strategy further into their retirement?
The missing piece
What’s missing from the PLSA paper is regulated financial advice and its vital role in delivering good quality retirement outcomes and the long-term success of pension freedoms. Most of the suggested actions in the paper would be delivered by taking regulated financial advice and recent studies show that people who have taken regulated advice are far more engaged, save more and have a better chance of achieving a good retirement outcome.
Regulated advice also delivers much better consumer protection as users would have financial recourse if the advice was wrong whereas without regulated advice, the consumer takes on all the risk themselves.
What I would really like to see is schemes and employers being encouraged to make affordable advice solutions to their members in the pre-retirement years. This is the best way of achieving personalised quality retirement outcomes in a world of choice, complexity and ongoing risks.
Andrew Pennie is head of pathways Intelligent Pensions