The future of retirement income: what needs to change?

Louise Doherty: Hi, 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's pension industry.

The topic for this episode is the first in the Future of Retirement Income series. And it's all about innovation in products and technology, and how they can help provide flexibility and the opportunity for customers to improve their outcomes at retirement.

I'm so pleased today to be joined by Claire Altman. Claire is our MD of Individual Retirement at Standard Life, and she's actually just authored a white paper called Avoiding Sleepwalking into Retirement.

Claire, do you want to introduce yourself to our listeners, tell us a bit about you and what you do at Standard Life?

Claire Altman: Yeah. So I joined Standard Life about three years ago. The idea was to bring innovation to the retirement income sector, think how we can better help customers achieve both certainty and flexibility in retirement.

Louise Doherty: We know the retirement industry has changed dramatically over the last 20 years from a system where final salary pensions were at the heart, and actually now the onus is on the individual.

So actually, thinking about retirement savings, financial planning and how to get a lifetime income becomes more and more important.

Individuals are trying to work out how much do they need to save, how long do they need to work for, how much do they need in retirement? And how do they then make sure that they have enough income throughout their retirement journey? Which is going to change, so you don't hang up your suit on a Friday anymore and start gardening on a Monday. Retirement is completely different.

So I think today we're going to think about what do we need to do in the industry to try and reshape what we do in retirement to make it easier for consumers?

So to start with, Claire, let’s have a think about where are we just now and where do you think we need to go to in the retirement income market?

Claire Altman: So I think there's been huge success in getting people to save. So auto-enrolment has been brilliant. More than 10 million people now are saving when they weren't before.

But then the challenge, there's two challenges, really.

One is how do you get people saving enough?

And then the second challenge is how do we make sure we turn those savings into efficient income?

On the first challenge, how do you get people saving enough. We know the government is looking at this, and I think there might be a podcast at a later point talking about that. So I won't dwell on that now.

But the second one, which is how do you make sure that the savings are actually turned into income as efficiently as possible? Probably two aspects to that. First is access. How do you make sure people get the right help? And I'm not talking… I'm not using technical language here. You know, it is actual help that people need.

And then secondly, how do we make sure that the right products are available so that once they've had the right help, they then actually have the right products that make that journey as smooth and efficient as possible?

Louise Doherty: Mike, anything to add to that? I know you've got quite strong views as well.

Mike Ambery: Yeah, I do have strong views. I completely agree with what you say, Claire, there. And equally, the title of your white paper in terms of sleepwalking. Adequacy is the first point to me of don't sleepwalk in terms of contributions levels and build-up of pot that you need at the point of retirement. 

But then at retirement, how do you make that decision? We know less than 10% of people take good quality of advice and determine how to spend their pot.

But is spending their pot, and should it be, a binary decision at the point of retirement, which often it is, i.e. “I'll take all the cash”, “I'll maybe purchase an annuity”? But that binary decision isn't right for many people. So having guidance, maybe targeted support, some sort of simplified guidance would enable individuals to choose different products to meet different spending needs during their sort of retirement, or spending phase as I’ll call it.

So back to that sleepwalking question. Don't sleepwalk your way through to just one decision and then everything's OK. It isn't. You can have better outcomes by utilising more products and utilising guidance to help make those decisions.

Louise Doherty: Building on that, Mike, thinking about kind of freedom and choice coming in. What are we actually seeing? So are we seeing people taking advantage of that or not? Because listening to you, it sounds like they're still making one decision on one product route. What do we see in the market and from our own customers?

Mike Ambery: Yeah, 100%. So the idea of freedom and choice, I think, was very clear, having more choice. It wasn't about buying the Lamborghini, at the time, encashing your pension, being able to do that. But we saw annuities drop off, the level of protection and security that individuals actually need.

To your intro, Lou, where you spoke about needing security and making the right choice during retirement, the risk is all on individuals in DC. How do I take a pot? Do I even know that I need to take my pot? Do I even know I need to convert it and do I know how long I need that money for?

So annuities just fell off. Fell off the charts, so to speak. And, Claire, I'll bring you in onto that. Are annuities having a good time nowadays?

Claire Altman: So you're right. Annuities did fall off, 2015 when freedom and choice came in, largely because of where interest rates were at that time. So because interest rates are now not low like they were and unlikely in the coming years to ever go as low as they were, they've been rediscovered, if you like, because they were a great product. I mean, they provide a guaranteed income. 

And to your point around a binary decision, is it either drawdown or annuity? I think people are getting the idea that you don't have to use 100% of your pot to buy an annuity. You can buy a bit. And then as you get older, buy a bit more and then older still, buy a bit more. And each time, you know, when you come to the market and you're getting older, your rates are improving all the time. So that point around kind of combining the best of everything for an individual is absolutely right.

Louise Doherty: What do you think is stopping people being supported enough? Not leading you by using the word supported, but what is stopping people being able to make those types of decisions about how they take their retirement income?

Claire Altman: Very interesting question. I think the first problem is that most people, you know, a lot of people don't even know they've got savings. Most people don't understand the landscape at all. Most people find it very boring and complicated and hard.

And we know, I think, from the research that kind of in the six months leading to retirement, people kind of get panicked. They do panic. And it feels like a terribly hard, complicated decision that they’re being asked to make. So it shouldn't surprise anybody that they take their money out as cash.

And the Treasury we know got a bit of a windfall from freedom and choice, an unexpected windfall, because people were taking their money out as cash. So to your point around the few number of people who are actually taking advice, I think obviously the first thing is to just make sure that people are getting help, whether like you say, whether it's targeted support or simplified advice or actually just full advice.

I think the first thing is just to help people just manage that decision, truthfully.

Mike Ambery: OK. In terms of that, Claire, I'd just like to pick up that point of help, education and understanding. How can we sort of move that forward? Is there a need for some sort of different guidance or advice?

Claire Altman: So I think there's two solutions. I think one is making the right kind of help available. So rather than try and change people, rather than try and kind of impose on them education that they may probably not want to take on board, better support them in the right way. So give people the right kind of help, whether it, as I say, whether it's targeted support or simplified advice.

I think trying to educate people so that they can make their decision on their own, I've never felt that is the right way forward, truthfully.

Mike Ambery: So if we move forward on that and I'll share a personal viewpoint, I think that a lot of people, when they approach retirement, the first phase of action is consolidate. I'll take all of my pension funds. First of all, I’ll find out where they are. Secondly, I'll think, let's consolidate them into one place. Not necessarily thinking, what's the right investment fund, what's the right charges, what's the right vehicle? And then beyond that, then we'll make a right decision at the point of retirement.

As we've spoken about, that's usually binary. If it's not binary and that education is the key point, whether it's advice and guidance, are there enough products available?

So we've got annuities, we've got cash, we've got drawdown. What else should be needed, when you look, about somebody retiring? What do they actually need, in terms of different products, maybe for volatility or for different spending needs?

Claire Altman: So the way we think about it is in two parts. So if you have your fixed outgoings guaranteed by income coming in, so your heating and eating, you don't have to worry about that, then there's a greater chance that you're happy to take risk with the income that is available for your discretionary spend. So holidays, cinema, that kind of thing.

And we think that the likelihood is most people will still need to take risk in retirement because they won't have enough, they won’t have saved enough. And this is where smoothed funds come in actually, because the smoothing takes away temporary volatility. So you’re avoiding those situations where somebody might disinvest just at the worst time when markets are low.

Mike Ambery: And we've seen, globally, smoothed funds take off realistically. 

Claire Altman: Yes.

Mike Ambery: Amongst other geographies as well. Do you see that being what we'll see in the advice community in the UK as well?

Claire Altman: I think so, I think as attention shifts from accumulation to decumulation, they will become much more widely used because they are a great product. And I think they absolutely meet the consumer need, which is how do you help people stay invested? You know, which they absolutely need to do.

Mike Ambery: So, Claire, just wondering your thoughts on decumulation and mandating decumulation. We've seen in Australia, it's been a couple of years now where decumulation options are sort of mandated, giving different personas, and different customers. How do you need to take retirement given different options that are defaulted for individuals?

I guess we've seen that from the new UK government coming in and saying, you should have decumulation options. Do you think it's a good idea, first off? And then secondly, how many do you think is a good idea?

Claire Altman: I think they're great idea, truthfully, because, you know, to the point we've been making about people just don't have the understanding, truthfully, and probably don't have the interest, if all those people who actually just want someone to do it for them, I think this is absolutely the right way forward.

And then in terms of how many options, I think it depends on the scheme membership and how wide it is, truthfully. But I think trustees, for example, will be very well placed to be able to think about that for their members.

Louise Doherty: I think it's really tricky, isn't it? Because even sitting here, there's three of us here and not one default at retirement is going to suit us, because you've got two women, a man. You guys are both married. I’m not. So we've all got different thoughts about what we want to do with our retirement income. So I think it's a really hard job. But I think it's absolutely needed.

I'm talking to my dad about how he's going to take his retirement income. At the moment, we’ve still got two pots sitting that we’ve not done anything with and I work in the industry so I should be able to help him.

But it is, it's really difficult. So I think it's a big task to take on. But as you say, the trustees are hopefully in a really good position to be able to make a big difference. 

Claire Altman: Yeah, I think so. If you think that, you know, to your earlier point about DB, nobody used to say, “Oh, well, is a guaranteed income increasing over time the right thing for everybody?” It was just good, right? And so everyone was comfortable with it. I think that's... We've got to get back to that kind of thinking, which is, what will be good for most people, even if there are some things that are better for some people? And then make guidance and advice more accessible for those people who might have a different need or requirement.

Louise Doherty: We even see that in the accumulation phase, don't we? So with certain workplace schemes, you've got your default. But then you've got plus versions of it, you've got one, two, three, four, five versions of risk rating. So there's optionality there for those that feel comfortable to either make their own decision or take advice to take a decision.

But we've got the majority of people at least now saving through that default and accumulation. So you're right. You can see that working well…

Claire Altman: Yeah. I don't think we should be frightened of it, truthfully. I'm sure we can get it to work. I think we should get it to work, because I think it is absolutely the right answer.

Mike Ambery: So do you think since 2015, we've missed the gap, really, in terms of giving enough support and having the right products available? Are we really about a decade on from having the right solutions now being available? And equally with the utility of data, being able to support individuals with guidance and, of course, advice where it's required, to make the right decisions?

Claire Altman: I think so, and I think the interesting thing will be that as those people who were auto-enrolled get older and the pots of money sitting in master trusts get bigger, as we know they will, it will become… I mean, probably three to five years from now, there will be a lot more focus just because of the size of the asset pools.

Mike Ambery: I’ll ask one other thing. Do you think the removal of a mandatory retirement age has worsened people's ability to know when they need to retire? In our Retirement Voice surveys, we often ask the question, “When do you think you’ll retire and when do you actually retire?” And it's usually a differential of, you know, up to five years. Most people, like myself, tend to go, “I would like to retire at 55, 56, 57.” Meaningfully, I'll probably look at the State Pension age and I'll go, “I'll probably retire at 66, 67 or 68 or something like that.”

What's your viewpoint on harnessing to a sort of State Pension age as a retirement age? And that would help people understand when to decumulate, when to spend and how to make the right decisions.

Claire Altman: So it's a good idea, I think. I think the challenge is that most people will probably have to carry on working a bit, truthfully. But you're right, having some kind of yardstick by which you can measure it probably makes life easier. No, I do agree.

Mike Ambery: We see as an industry various different types of pension schemes that people are members on. And I'm not sure they know which scheme they’re a member of. We've got DC, defined contribution. We've got DB, defined benefit. We've got Care. We've also got CDC, that's just recently been introduced. And you've been behind some of the thinking and support around that for some period of time. Where does the decumulation product and CDC actually fit in your mind?

Claire Altman: So I think CDC is absolutely right for certain types of employer. Generally speaking, national employers who are happy to take it right from the start. So whole of life CDC for national employers I can see works very well.

When you start thinking about commercial CDC for decumulation, I think it gets harder. So for example, whether we can do something like sector-based CDC for some sectors that are not well served, like the care sector or the housing sector. Something interesting to look at, I think, down the line. 

But very much I can see their value. I just don't know that they've got kind of universal applicability.

Mike Ambery: And do you think it will actually fit into the universe where we already have DB, DC? Will CDC just be another complication for operationally and for anyone who's a member of these vehicles?

Claire Altman: Yeah, I think for the right employer they will be a good thing. But like you say, it won't be for everybody.

Mike Ambery: Louise, is it time for a crystal ball?

Louise Doherty: It’s always time for a crystal ball, Mike. We do this. So we like to get our crystal balls out, think about what's going to happen in the future. So say we were sitting here in five years’ time and you got your crystal ball out, what is the one thing that we have to have done that you think will make the difference?

Claire Altman: I think if we can sort out the advice, guidance challenge that will fix things. That will go a long way to fix things so that instead of, you know, 9 in 10 people not getting any help, if you reverse that, 9 in 10 people getting help, I think that would make the biggest difference.

Louise Doherty: Thanks for joining us today on the Thinking Forward podcast. It's been great to hear from Claire. And if you'd like to read Avoid Sleepwalking into Retirement, it's on the Thinking Forward website. Just search Standard Life Thinking Forward.

And as always, if there's any other topics you'd like us to cover, please let me or Mike know. Thanks.