Retirees need help to negotiate the potential minefield of choice, according to influential sector research
The next generation will be “working until they drop” unless drastic changes are made to the UK pension system, according to an exhaustive report commissioned by the Labour Party
The Independent Review of Retirement Income (IRRI), led by Professor David Blake, was launched following the ‘freedom and choice’ reforms announcement in the 2014 Budget. It found millions of pension savers were now exposed to risks that they simply did not understand, and should not be expected to manage themselves.
The report called for a new “narrative” on pensions to be developed with cross-party support, and for an independent pensions commission to be established. It also said the FCA should be tasked with designating good quality retirement income programmes as ‘safe harbour products’.
Professor Blake, director of the Pensions Institute at Cass Business School, said: “A great deal of effort will now have to go into re-establishing what a good pension scheme is. This will need a commonly agreed national narrative.”
Consumers need the combined skills of an asset manager, actuary and financial expert to get a good outcome”
Jim Boyd, corporate affairs director at Partnership agreed that savers did not yet have the skills they required. “We expect individuals to manage the bewildering array of choices facing them at retirement, which requires consumers to have the combined skills of an asset manager, actuary and financial expert to get a good outcome,” he said.
Boyd believes this is a huge burden on the average person at retirement, where one wrong choice could have serious consequences. It could lead to an individual running out of money before they die, or leave them living in avoidable poverty in the later years of retirement.
Gregg McClymont, head of retirement savings at Aberdeen Asset Management, and former shadow pensions minister, believes attempts to help retirees with their decision making have been inadequate up to now. “The elephant in the room is the fact that the government is already struggling to get people to take advice or guidance. You only need to look as far as the low take up figures for Pensions Wise to see that.”
A safe harbour
The safe harbour designation advocated by the report’s authors would recognise products that were well designed and governed, transparently priced, required minimal consumer engagement and offered good value.
The report calls for providers and advisers to be able to use a simple decision tree to guide retirees to these kite-marked products. But argues that providers using these tree must be protected from being sued.
Tom McPhail, head of retirement policy at Hargreaves Lansdown doesn’t think that safe harbour products are needed, however. “The products available today are largely fit for purpose already,” he said. “The challenge is rather to make sure that investors are helped to engage at a level which works for them and to make good decisions, even if that is simply to buy an annuity.”
The products available today areho largely fit for purpose already”
The review also addresses contribution levels, and suggests that people, together with their employer, should be saving 15% of lifetime earnings towards pension. Bob Scott, senior partner at LCP agrees: “This is in line with the Association of Consulting Actuaries’ recent call for a gradual move in combined minimum contributions to 14-16% of earnings. Without such increases, auto-enrolment will be judged a failure.”
There was also call for pensions policy to be taken out of the party political arena, by creating an independent Pensions, Care and Savings Commission. Partnership’s Boyd said: “Consumers must be protected from short-term political tinkering and tax grabs at the expense of future generations. We need to rebuild trust in the pensions system if it is to deliver a stable pensions and care system going forward.”
The report concludes that this will not be an easy job. “This is a significant challenge,” said Professor Blake. “But it is one that is well worth the effort because, as the pensions minster Ros Altmann says, “pensions are precious’.”