How do we design defaults in a post-freedoms world? Guest writer Darren Philp explores some of the conclusion from a panel at DC Insight
If you’re anything like me, you’ll have a fair idea what you’ll be up to at the weekend.
Arsenal are playing Swansea City away on Saturday for start. And next weekend? Tottenham Hotspur at home. Now that’s a weekend, assuming we win of course. The alternative is just too horrific to contemplate.
You’ll probably also know which in-laws you plan to visit this Christmas, and might have a couple of weddings in the diary for next year. But beyond that? Two years into the future? Five? Ten? Twenty, or even thirty?
People now have far greater choice about how and when they use their pension savings. Savers can decide how to spend their money based on what they need at the time. So, like the Arsenal season ticket I’m getting as soon as I convince my wife that getting me out of the house for a few hours a week is a valuable investment, short term decision making can take the place of long term financial planning.
Some people who have taken small pots from The People’s Pension so far will I’m sure have used them to pay for a holiday, or for some new windows. There’s nothing wrong with this, but it highlights the fact that greater freedom equals greater risk that people could, and will, run out of money. After all, you can only spend it once!
None of us really know what our financial needs will be this time next year, let alone in thirty years’ time.
So how can the pensions industry deal with this in designing investments that last for the long term? And is there anything the industry can do to help people make the right decision?
As an industry, we’ve spent years trying to get people to engage fully with pension saving”
Yesterday, I was lucky enough to be asked to explore these issues as part of a panel at DC Insight. There was a consensus that in an ideal world people would be fully engaged with their pensions on an individual basis, aiding better long term planning. That’s where the consensus stopped. The options on the table – defaults that offer good, but not necessarily perfect, individual outcomes for the majority of savers versus an even greater focus on engagement.
The problem is this. As an industry, we’ve spent years trying to get people to engage fully with pension saving. It hasn’t worked. If it had, we wouldn’t have needed auto-enrolment. The vast majority of savers in The People’s Pension leave their savings in our default fund, and there is no reason to suspect that most would choose to do anything different when retirement gets closer.
That’s why I’m a fan of the ‘keeping my options open’ default as investments start de-risking as people approach their retirement. Because, let’s face it, that’s all any of us can do when trying to predict the future. People at some point will need to make a decision but we know that they will leave it very late.
That’s why I’m a fan of the ‘keeping my options open’ default”
It’s not ideal – individualised defaults (although a contradiction in terms, frankly) targeting something specific would provide the closest thing to perfect outcomes for all. But life would still be unpredictable. Spurs might score in the last minute of injury time. Arsenal might not win the league (unlikely, I know).
Nobody knows what the future holds. Retirement savings need to be flexible enough to cope with the unpredictability of life. And, for now at least, to my mind providing a default investment solution that lets people keep their options open is the only way to go.
Darren Philp is director of policy and market engagement for The People’s Pension