Retirement income: what help do people really need?

Louise Doherty: Hello, and welcome to the latest episode of Thinking Forward with myself, Louise Doherty, and Mike Ambery, where we explore the trends and developments affecting the UK pension industry.

This is our second episode in the Future of Retirement Income series. And I'm absolutely delighted to be joined again by Claire Altman. Claire is our MD for Individual Retirement at Standard Life.

And we're welcoming a podcast virgin, our first-timer Matt Burrell. Matt is our Senior Public Affairs Manager at Phoenix Group.

So, Claire, I'll come to you first. Remind the listeners who you are, what you do for us at Standard Life.

Claire Altman: So I joined about three years ago, really with a mandate to set up a new business unit within the group focusing on innovation in retirement solutions for individuals.

Louise Doherty: And, Matt, tell us a bit about what you do at Phoenix Group. I know you've been in the industry for a long time now, so what else have you been doing in the pension industry?

Matt Burrell: Yeah, I've been knocking around for a wee while these days. So I work in our Public Affairs team. And really, that's about telling the stories that we get from, you know, people working at the coalface, from the actual environment in which pension products are used and making sure that those insights are brought to politicians, policymakers, civil servants, so that when we're looking at making changes in the regulatory environment and the legislative environment, we're doing it from a point of knowledge and making sure that we're putting the customer first.

Before this, I worked at the Association of British Insurers, also doing pensions policy. And before that, I worked at the Pensions and Lifetime Savings Association, also doing pensions policy. So yeah, I've been knocking around these parts for a little while now.

Louise Doherty: You'll know as anyone, the industry has changed so much in the last 20 to 30 years. The move from DB to DC. Decisions are more complex for customers. There's good and bad of all of the reform that has come through. And today, we're going to think about how have we ended up in a situation with so many options for customers and they're not sure what to do, they're perhaps not taking advice? How have we got there?

Matt Burrell: I think by accident, I think is probably how I'd describe it.

I mean, you could trace this, you can trace this back in a variety of different directions. You could go all the way back to the Retail Distribution Review, getting rid of commission in the advice world, and therefore sort of the relative decline in the number of people getting advice. You can look at pension freedoms. I mean, you could go back to Gordon Brown getting rid of dividend relief, which, you know, the effects it may or may not have had on DB pensions.

But I guess what is important, really, is where we've ended up. And we've ended up in a place where you have a system that's built on inertia from a savings perspective, and then people get to the point of retirement and they've got to make some really difficult decisions without, often, the support that they would need to make those decisions properly.

Louise Doherty: And, Mike, views on this? I know you've got quite strong ones.

Mike Ambery: I do have strong views on this. It's really, as you say, Matt, it's a question to me of, where does education begin? And when do you start to engage with your pension and savings? And when do you start to realise that you need to spend them? And how do you want to spend them?

I think most people tend to make decisions themselves, don't necessarily look out for the advice that's available. I think those people that do look for advice do probably get more and understand what they need to do in terms of spending cycles and get that support.

There is, of course, free guidance and free advice and free support available in certain places. But those people that do take that up don't necessarily follow through on the guidance that comes through from that.

Also, I don't know about you, Lou, but when I'm faced with a lot of choice, like TV channels I just lock mine on sport because it's easier and I know what I'm going to get all the time. But if I'm given more choice, it doesn't necessarily help me realise that there are other things available out there.

Same analogy there, there's news channels and movies that I simply don't know exist. So for a consumer looking at retirement choices, there's a plethora of solutions that Claire and Claire's team have come up with, as well as the industry's come up with, over the last few years. Unfortunately, they're not taken up because people sort of see it as a binary option and decision at the point in time and don't have the time to be, unlike Matt over the last ten years, looking at how to take benefits and understand pensions inside and out to make those decisions.

Louise Doherty: So think about how can we make this easier, what we can do to kind of facilitate this? Is it something that we need from government? Is it something we can do as providers?

Claire, for the new kind of products that your teams have been bringing to market, how do we make it easier for customers to understand and take up these options?

Claire Altman: So I think most people, when you ask them, would like somebody to do it for them, right? They don't want to do it themselves, truthfully.

The move away from DB to DC was not because people wanted to take hold of the retirement decision-making themselves. It was a byproduct of DB not being offered anymore. People don't... I don't think people want the decisions, I don't think. Most people want it all done for them. So I think our job as a provider is to make that happen. We need to make it possible to do it for a customer. And then it gets tricky. How do we do that in a way that works for the legislation?

But I think, for example, defaults in out of schemes can go a long way. And they don't just have to have one default. You could have a few defaults for different cohorts of members. And then people could be helped to choose the right default for them. So the changes that are being proposed with targeted support and simplified advice, all of that can be used to help direct people into the right bucket for them.

Louise Doherty: And, Matt, any kind of comments on that? What do we need from the government to make it easier for people, and for us to make it easier?

Matt Burrell: I think the one thing I would say, because, you know, you've got to give government and sort of policymakers credit where credit is due, is that I think they really are grasping this particular nettle at the moment. And they're looking at the sort of, the policy environment that's emerged as not being one that they would 100% be comfortable with if they were designing something from scratch. It's very difficult as well, because you're sort of, you know, you're sort of redesigning a plane mid-flight.

And, you know, people are retiring all the time. It's just, it's a constant stream. And so trying to make these changes in a way that industry can implement, that supports people is difficult. But I think they are trying to do it.

The two key things that I'm looking at at the moment are, as Claire mentioned, the idea of trustees having to provide some retirement options that they think are suitable for the people within their scheme, having sort of a bit of a look at the demographics of the members that they hold and coming up with solutions that broadly match their needs.

And also some of the quite exciting work that the FCA and Treasury are doing on the Advice Guidance Boundary Review. And trying to, again, move away from binaries, move away from,  is this going to be full holistic advice or will it be sort of just depersonalised information? And trying to create that middle way to provide that bit more support for people.

And that should be happening. There's a lot going on. I think we're expecting more from the FCA this year about advice and guidance. There's a pensions bill next year, which could see some of this going in. So I think there is movement in this space, because I think what people recognise is it's not about necessarily getting the perfect solution for everyone. It's about getting people to a place where they can retire safely.

And it's quite a unique position where you can do yourself a lot of irreversible harm by making bad decumulation decisions, incurring massive tax charges, you know, putting all of your money in a bank account and letting it erode by inflation. There aren't many other times in your life when you are in such risk of damaging yourself in a way that you can't really come back from.

Claire Altman: So is it worth just highlighting that unexpected tax windfall that the Treasury did get from freedom and choice because so many people are withdrawing all of their savings as cash? Which kind of makes sense, right? Because people know what cash is, they understand it. They see a number, and they think it's like a bank account and they can just take it out.

But I think the number's something like a third of people are taking all of their savings out as cash and, you know, it's not really in their interest, given the amount of tax that they have to pay.

Matt Burrell: I think it's one of those really difficult things, right? Because you look at those FCA statistics that they publish about what the most popular forms of access are. Is it full encashment? Is it drawdown? Is it the lesser-known UFPLS?

And because these are just single data points, you can't… It sort of is, correlation, causation, what are we 100% seeing here?

But the sort of, the circumstantial evidence is pointing towards people wearing down their savings pretty quickly. And I think it's really good that government is sort of grasping this and saying, hang on, this can't be allowed to go on in perpetuity. Otherwise, you're going to see a situation where a lot of people get to a certain point in retirement, have no money and become dependent on the state.

Mike Ambery: I just want to change tack a little bit. Claire, I'm going to ask you. So I think advisers have done a really good job in involving propositions, have started to look at different products that have come available to market. But I also reflect on financial personalities and start to look into that lens.

I guess there's a bit of behavioural science coming in here where I sort of view where we spoke before, and Matt spoke before, about the drawdown and annuitisation being binary options. They're not, right? So how do we change that?

Claire Altman: No. No, they're absolutely not. Well, I think they are changing. And, as you say, advisers are, the ones I've spoken to, massively interested in what they can do for their clients.

Rates are very attractive at the moment, likely to stay relatively high for a while.

And so advisers see very much the benefit of the guaranteed income that you could get from an annuity, but mixing that with drawdown, because, obviously, that does give flexibility and also allows for growth.

And the key thing, then, is that rates improve as you get older. So if you buy a little bit of annuity to start with, doesn't mean that's it, you're stuck with only a little bit. You obviously can increase. So by the time you're, I don't know, 80, 85, you might be 100% annuitised. But you've had the benefit of growth from drawdown in the earlier years. 

Mike Ambery: So what we're talking about there is a true flexibility in spending, for a consumer to be able to vary products, to vary spending to needs in their sort of life cycle.

Claire Altman: Yes. Absolutely. And I think that's one of the reasons why it's so good for people to have, call it targeted support or simplified advice or full advice, but some help, because trying to do that on your own, massively hard. Massively hard.

And then, secondly, if there's trustees who have built these strategies for people to adopt, then it's just a much more straightforward process for somebody really to get the benefit of all that there is available.

Mike Ambery: Completely. Matt, so where are we? What have you actually been doing in terms of decumulation options?

And to not put words in Claire's mouth, and you can correct me on them, but I think probably trustees and fiduciaries that are running pension schemes, and providers, do probably know a little bit more than the general individual about these options.

So how are we building decumulation options and do you see a plethora of decumulation options coming in?

Matt Burrell: So I think the way that I would see it first, I mean, if we're going to talk about correcting you, Mike, there was a point earlier when you said there was free advice out there. And there definitely isn't free advice out there. That's, you know, that's specifically forbidden, in terms of how you would cross-subsidise that. But that's a small matter of, you know, correcting the record.

The way that I would see it, and I'm quite a visual person, I like to think of these things as it's sort of a series of different safety nets, right? In an ideal world, everyone would get holistic financial advice. Because it can be a wonderful thing where, basically, you talk to someone, you think about your sort of... It's not that far away from therapy, right? You think about your emotional wants and needs, what you want from life, and how you're going to be able to facilitate that with your financial assets.

In an ideal world, everyone would get that.

But we know that we do not live in an ideal world, and we're probably at around 8% of people getting that kind of support.

So, OK, that's one safety net. At the moment, there isn't another one that sits underneath. What you probably want is another series of safety nets, one of which could be targeted support, which allows, you know, can allow people to use a bit of data and a bit of personalisation about you to guide you to a place where you're likely to make a good decision.

And then underneath that again, if that's not going to be for everyone, you can also have these defaults that trustees and providers can put in place.

And I think, you know, I think a lot of providers and a lot of trustees would like to do this.

But it's one of those weird things where if you have a duty to do it, you can do it with less liability. So you're not just doing it off your own back. You're not doing it...  You know, you're not making that active choice. If you're fulfilling a regulatory obligation by doing it, you can do that bit more.

And what I'd love to see as well is there's a bit, I get very nerdy here, around perimeter guidance, or PERG as it's known, there's probably a purgatory joke knocking around there, that defines what is and is not advice.

I think there's some smart stuff that the FCA can do in there to allow trustees to do more, because they're quite often the ones that are caught out by this. And I think the vast majority of trustees want to do more. But an environment needs to be created that allows them to do so. 

Mike Ambery: So we need that sort of regulation change to get to my halcyon world of different advice and guidance being... 

Matt Burrell: Absolutely. And, as I say, we're quite fortunate that they are sort of in train. And the way that I see it is what this is fundamentally about is about reducing harm and reducing the likelihood of harm.

And I think before, we've kind of been in an environment where the key concern was defining what is advice and making sure that, you know, the boundary between them was, you know, absolutely sacrosanct.

I think now we're kind of heading into an environment where we're in a post-Consumer Duty world, where, you know, you've always got to bear in mind foreseeable harm and the best interest and fair value. That, actually, we can start to do things that will prevent everyone from taking, you know, decisions that can really, really harm them.

Mike Ambery: Matt, you talk about happiness. I view the home to be a happy place. The home is also a different part of equity. Pension and home are usually the main primary points of saving. I guess, turning on to that, where do you think housing wealth fits in decumulation?

Matt Burrell: I think it's an interesting one, because...for a couple of reasons. A, because of the nature of the housing market in the UK. And also, when you've got people, I don't know, I think the stereotypes say Gen X who tended to miss out on DB pensions but haven't really been auto-enrolled enough to build up a substantial pot, the one asset that they are really likely to have is a home.

And, you know, there is probably, there is an argument that says people should be able to have the financial products that allow them to utilise all of the assets that they've accumulated.

So I think there is, whether it's lifetime mortgages, equity release, I think there's a role in all of this.

But where it gets really difficult, which is kind of going back to the previous conversation as well, is that you sort of need advice to be able to do that or, you know, you need to be able to plan and think through these quite complex products.

So it's another area where I think actually having a slightly different approach to these things could really help. Because there's a huge amount of housing wealth in this country and not as much pension wealth as there ought to be. So that could be part of a bridge to the point where you've got the generation that's been auto-enrolled, like I have since the age of, like, 21, where hopefully, fingers crossed, I'll have a decent amount by the time I retire.

Mike Ambery: Claire, just on the same topic. It's pretty complex, though, isn't it, in terms of taxation and, equally, level of products? If we throw housing in there, you'll probably talk about a range of different mortgage solutions, equity release, like Matt said before.

In terms of retirement and decumulation, you'll throw in a further range of products and otherwise. What do you really think a consumer should be thinking with regard to all of these products?

Claire Altman: So I think Matt's completely right. I mean, it will be an essential part of many people's wealth. And to ignore it is not going to work, right? So there has to be a way that people can properly access it in the right way. And in terms of the order. So there's a right way and a wrong way of doing it. And you want to make sure you do it the right way, so you're not paying tax really unnecessarily.

There's an interesting angle here for technology, I think, as well. And as tech solutions begin to bridge the gap, I think for some of this stuff, it will get easier to provide the advice at a cost point that people can afford.

Mike Ambery: And linking onto that before Lou comes to her final question, and be amazed by her crystal ball when she gets that final question out there, it's really in terms of mass-market product, as financial advice. Do you think it will come to the fore again?

Do you think people will start as a whole population going to that advice? Is it the availability of advisers, first off? Because that's been a constraint globally. We've seen a shrinkage of number of qualified advisers able to give suitable support dwindling. Do you think that will change?

Claire Altman: So I was looking at recent research which is suggesting that most firms of advisers think that their client list is going to grow. And there's clearly a need, right? And Matt gets cross with me if I don't get the dividing line between targeted support and simplified advice.

But the truth is people need help and, increasingly, they will need help. And whatever flavour it is, they've got to be able to access it in a way that works for them. And that must be the way forward. I can't see any other way of solving this one.

Mike Ambery: Cool. Moody Matt, then, obviously...

Matt Burrell: Moody Matt! Having an obsession with getting the right regulatory terms used in the correct place is not moody, it's just, it's accurate. But, fundamentally, beyond that, I agree with everything that Claire said.

And there's this ideal world where everyone would sit down and plan out their financial future. But it's quite difficult. Humans aren't very good at looking more than five years ahead. It's why investment pathways are only for the next five years, because cognitively we struggle to get beyond that.

And pensions are, you know, ultimately a little bit to do with death. And no one really wants to think about it and no one wants to think about what's going to happen in, you know, when you're 75 and you might not be... I mean, my dad's only 75 and he's doing alright. But when you aren't able to do what you used to, what you used to be able to do.

So yes, there does need to be a way of providing that kind of support, but also a recognition that we're not going to get it right in every circumstance, and making sure that there are those safety nets that can protect people that don't do that.

Mike Ambery: Cool. 

Louise Doherty: I think, for once, my dad's going to be happy that I've not spoken about him on the pod and it's you speaking about your dad today, because I keep getting told off on that one.

Finishing off, we always have a crystal ball question. So listening to you both today, we've talked a lot about personalised defaults at retirement. So I've got my crystal ball out. I have a look in. Is it going to work? Are people going to get better outcomes? And how long might it take?

Just a killer question at the end.

Matt Burrell: Killer question. Well, see, the thing is is that, normally, we're told never to make predictions about these things and make hostages to fortune, but I'll try and do my best. 

OK. You could say that there's a pensions bill next year. They might choose to put something in that. You've got the normal parliamentary timetable in terms of how long it takes it to get through. Then presumably secondary legislation. This gets into very boring technical parliamentary stuff. But I think in the next couple of years you could see the process of building these retirement defaults come.

And I think there's also other exciting things going on around open data, which I won't spoil the party on because I know I'm talking to you about that in the next one, that could make advice back to being something that a lot of people can get once you get that efficiency of data gathering. So that advisers are doing the good bit, which is talking to people and planning and that sort of thing, rather than engaging on... than having to gather data.

So I'm quietly optimistic, is how I'll describe myself, without committing to a timeline.

Louise Doherty: OK. Accurate. Claire, how optimistic are you on it?

Claire Altman: So, no, this is definitely the way, the direction of travel. So I think I could quite easily see, and we'll see if I'm right, five years from now, a consolidated picture of master trusts. Maybe you've got ten very, very large ones with very sophisticated defaults, with proper, proper help and support available for people. That doesn't seem to be too weird.

Louise Doherty: And it would feel wrong not to ask you, Mike. I don't want you to feel left out. What do I think's going to happen? 

Mike Ambery: I think a lot of things need to be put in place. Part of that is what's happening in taxation, what happens in terms of product and what happens in terms of advice and guidance.

I'm less optimistic based upon, if I look back over 20 years, nothing's really happened to move the sort of dial forward.

I would love it if Claire's right, and I'd love it if Matt's right, that we do take where we are right now and move forward.

And the last 20 years are condensed to be, let's get products and the solutions to members that are actually viable, utilises technology.

And I guess that's not really a challenge for us in this room alone. It's for everyone within the industry to take on. So, I mean, I'd flip it the other way and stick it, there's an egg timer there. Let's get it right.

Because if we don't get it right, we're going to be facing a lot of financial poverty, have a lot of people making what some of us may say are poor decisions in retirement, because they don't have the support that could and should be made available to them, through certain players on the market not giving them those solutions that they need to have.

So I'd like it that you're both correct.

Claire Altman: Well, we'll have this conversation in five years. I think the one thing going for Matt and I is the wall of money. And truthfully, in five years' time, the amount of assets sitting in DC in this country will be close to a trillion. And the chances of interested parties not really getting hold of that I think are very small.

That's my view. But we'll have a conversation in five years and then we will see.

Mike Ambery: Maximum years!

Matt Burrell: Outrageous.

Louise Doherty: We'll finish by saying thank you both so much for joining us today. It's been great to hear from both Claire and Matt. 

And if you want to read the Avoid Sleepwalking into Retirement report that we've launched, you can get it on the Thinking Forward website. Just search Standard Life Thinking Forward.

And as always, let us know if there's a topic or a speaker you'd like to hear from.

As Matt's already let the cat out of the bag, he's joining us next time to take a deeper dive into the world of pension dashboards, so I hope you can all join us then. Thanks.