The Financial Conduct Authority (FCA) has unveiled its 68 page Discussion Paper (DP) on the ageing population with a view to publishing its strategy in Q2 2017 – just over a year from now.
It’s a mighty tome with the great and the good working within retirement product providers, mortgage providers, regulators, trade bodies, as well as ‘behavioural architects’ and psychologists.
As you would expect with the mix of people that have had standalone papers published within this DP, their views and concerns are varied.
However, common to many of the pieces is the view that right now we are not doing nearly enough as an industry to make life easy for our ageing population to navigate an often bewildering array of financial choices in retirement.
Big numbers
Let’s start with some stats on the size of that growing over 65-year-old population in the UK.
Between 2015 and 2020 the number of UK citizens over the age of 65 will increase by 12% or 1.1m people, as against the increase of the overall population of 3% in the same period.
The numbers aged over 85 will expand by 18% (300,000), and the number of centenarians by 40% (7,000).
The number of UK people over the current official retirement age has doubled in the last 20 years and the over 85-year-old age group is now expanding faster than any other, according to the Office of National Statistics.
At the same time as this monumental demographic shift, George Osborne has unveiled the pensions freedom and choice ‘revolution’ and in the private sector defined benefit (DB) pensions look set for complete extinction within a decade.
The big, potential success story is auto-enrolment. At the very least auto-enrolment has reversed the decline in retirement savings provision.
But right now, some 11.9m of us are still under-saving for retirement, despite automatic enrolment. Interestingly, three-quarters of under-savers are classified as middle- or upper-level earners.
Those that are already exercising ‘freedom and choice’ are tending to do so with inadequate recourse to financial advice or even newly-created guidance services.
Only 8% of the first wave of ‘freedomers’ since April 2015 decided to use the Pension Wise service and just 58% of those going into drawdown in the last six months have decided to get regulated financial advice before doing so.
A woeful number of people are shopping around for drawdown or annuity offerings at-retirement.
The feeling is that not enough communication is going on and that the communication that is going out right now is clearly not working well to equip at-retirees with enough knowledge to make sound financial choices.
Duty of care
One suggestion made in this DP was that a big (legal) stick needs to be wielded in the direction of providers, revising the Financial Services & Markets Act to place a duty of care for consumer outcomes specifically on providers.
Beaming in specifically on the growing group of over 65s, there is a recognition that those in-retirement need more tailored advice and support, more product options, which are better suited to specific later life needs.
And frankly, they also might need to be communicated with in a different way.
They also must not be treated as one homogenous in-retirement group, which they clearly are not.
The Personal Finance Society’s CEO, Keith Richards, has called for greater skill-base across the adviser community to support those in-retirement.
We already have the Society of Later Life Advisers working to the same ends.
The focus is on building certified expertise pools covering areas such as cash flow forecasting, income strategies, portfolio management, use of residential property as retirement income (i.e. equity release), tax advice (particularly associated with inter-generational wealth transfer), and specialist legal advice.
This makes great sense, as there is frankly some very specialist help that is needed and in-retirees need help findings those experts.
It’s good to talk
In the communications area, we need to think more about how we communicate, as well as what we communicate, to assist sound financial decision-making.
This resonates well with a theme, which the more enlightened pension providers are already pursuing, of having different customer journeys for users of different ages.
Step forward communications psychologist including Liz Barker who makes it clear that communicating with the elderly is different from the rest of the population.
Frankly after the age of 70, the brain is ageing fast and ‘crystallised intelligence’ is declining. More alarmingly, reasoning and deliberative capacity, otherwise known as ‘fluid intelligence’, begins falling as early as our 30s.
She advises:
1. Putting fewer choices in front of this audience in communication if at all possible
2. Categorising and sign-posting choices well – perhaps in terms of risks of not hitting target
3. Increasing ‘cognitive ease‘ – using plain English and jargon-free language in communications
4. Focusing on losses that may be incurred if no action is taken at a specific stage, as over the age of 70 we become more loss averse and more prone to inertia.
As we get older we don’t trust our memories as much, so we also become more at the mercy of scammers who can trick us by concocting and playing back ‘false memories’ with a view to taking money from us.
That’s before we get into the grim issue of cognitive decline which is becoming a big problem with our ageing population.
One in six people over the age of 80 have dementia, amounting to 850,000 sufferers in the UK today. These numbers will more than double to reach two million by 2051. 225,000 will develop dementia this year alone.
The industry is already looking for ways of safeguarding the growing army of the aged.
The ABI teamed up with BIBA to publish a Vulnerable Customer Code last month which brokers and pension providers alike are signing up to.
It’s vital that we face up to this challenge, as one of the well-documented facts about age-related cognitive impairment is that, while the ability to do even simple sums diminishes with age, many older people don’t realise that they are getting the sums wrong!
One of the themes that comes through in the DP is the need to get all the information about all potential sources of retirement income in one place so that in-retirement planning can be made easier.
Dashboard
With this in mind the concept of the pensions dashboard (more commonly trumpeted as a way of coping with legacy auto-enrolment pensions as many of those being auto- enrolled today will have many more jobs in their lifetime than the last generation, and therefore will accumulate many more relevantly small pension pots), is also championed as a great way for the over 65’s to get to grips with what exactly they have got to draw on in retirement.
There is also some discussion in the paper of the totally disinterested being pushed into default policies that are in the long-term interests of the member.
There will be a need for strong independent governance here with kite marking of simple drawdown products against strict quality criteria, for example.
There is also clear need for people to properly understand ‘longevity risk’ as they are now bearing that risk themselves rather than passing it to an insurance company by purchasing an annuity.
Research shows we underestimate when we are going to die – on average – by two years for men and four years for women.
But more importantly, few people have a good grasp of the probability distribution of them living to various ages. Yet somehow they have to cater for this spread!
Worse than this, if you look at the Australian example of what happens once annuity purchase at-retirement is made voluntary, the tendency to run out of money in-retirement is clear.
Down under 40% are running out of money before they are 75-years-old, a quarter by the age of 70.
We also know from the US experience that many retirees are taking out 8% or more of their retirement savings pot each year once they are retired.
On average, at that rate you run out of money within 17 years. So if you retire at 65 you might hit the financial buffers aged 82 years. But many of us have parents well into their 80s already, so it is highly likely we will join the growing ranks of the octogenarians (or older still) ourselves.
It is in this context that decision-makers face considerations like the potential for auto-escalation of auto-enrolment pension contributions to ward off mass under-saving which the next generation of retirees are currently exposed to.
There is a great deal in this paper which warrants discussion.
To quote author and motivational speaker Zig Zigler: “The first step to solving a problem is to recognise that it does exist.”
This paper lays out the scale of the problem admirably. We have a great deal of discussion and innovation to work through before we can hope to solve it satisfactorily.
Yet the consequences of not addressing this issue would be dire for many older people.
Adrian Boulding is director of retirement strategy at Dunstan Thomas
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