DC innovation critical to improving member outcomes
Defined contribution (DC) pension providers need to focus more on innovation to help members make decumulation decisions as it emerges many do not understand communications, according to research by Hymans Robertson.
In its The Decumulation market: opportunities for providersreport, the consultancy called on the industry to take a more innovative and holistic approach when developing their products after finding that members in different income brackets with different pension pot sizes have different levels of understanding of decumulation.
The research found a gap in understanding of communications between the size of pension pots. Almost 60% of members with pot sizes up to £100,000 understood their provider’s communications compared to 76% of those with above £250,000.
The gap widened when it came down to access to information. Just 62% of members with pots up to £100,000 felt they had access to all the information they need to make decisions about their retirement – far below 81% of those with pots over £250,000.
Women could be more at risk of being ill-prepared for retirement than men. A Club Vita survey of 1,000 people – aged between 40 and 60 in the UK – found people on average underestimate their life expectancy by 3.4 years on average for men and 7.9 years on average for women.
Just under a fifth of those with retirement pots under than £100,000 feel confident deciding which financial products suit their needs, compared to 52% with over £250,000.
Hymans Robertson head of products Karen Brolly urged the industry to innovate to provide consumers with the right support, guidance, and protection.
“As an industry that is responsible for delivering good outcomes, providers have so much opportunity to evolve and deliver products that help DC pensions members better navigate their options. Our research has shown many individuals feel underserved by the information they receive at the point of retirement, and this impacts how confident they feel when faced with important decisions,” she said.
There is a need for tailored guidance for the different circumstances that individuals face, she added.
The firm believes individuals should be able to have retirement plans covering a range of different products such as drawdown, annuities and other savings vehicles. It also suggests that equity release and longevity pooling could form part of a broad range of solutions.
Under the Financial Conduct Authority’s new Consumer Duty rules, providers must recognise the differing needs of consumers and serve them regardless of the size of their pot size, and empowering them to make good financial decisions for their future.
Brolly said: “[The new rules] also explicitly ask for providers to ensure they provide good communications, that are easily understood, tailored to customer needs, and delivered at the right time to help them to make financial decisions. Providers need to ensure these regulations are met when developing new products.”
There is significant opportunity for providers to serve members better by making use of online tools to meet their needs, according to the report.
Members who are reliant on DC pensions should be helped to answer these key questions about their pensions: ‘What have I got. Is it enough? What should I do next?’
Brolly believes providers should not only take a more holistic approach to retirement planning – but also give people more ways to consider all their assets to help achieve their retirement income needs.
When pensions dashboards are fully operational, having all pension pots in one place would allow for easier integration and a smoother consolidation process, she said.
She also believes that providers and regulators could give individuals more information around what sustainable income levels might be for their specific pot size and retirement choices.
Equity release
Hymans Robertson’s report suggests that equity release could be considered in some circumstances, pointing out that the UK has around £5.46trn of housing wealth relative to £6.45trn in private pension pots.
For the large and growing proportion of retirees who will not have amassed the size of pension savings they’ll require to maintain the lifestyle they desire, there may be a consideration for them to access the wealth held within their homes.
“Equity release products may be well-suited to those individuals who are looking to increase their retirement provision, but who aren’t primarily concerned with preserving their wealth to pass on as an inheritance to their dependants,” said the report.