Even though more than two months have passed since Budget, the pensions industry is still coming to terms with the long-term implications of dropping the requirement for pensioners to buy an annuity on retirement.
The most important concern is to ensure members buy the right product at retirement to match their fiscal needs. To that end the government said pension providers must give scheme members guidance about their options on retirement.
But there are serious concerns, which I raised in a recent article for Professional Pensions on the future of default funds, about the timing of that guidance.
The reality is that at-retirement guidance is around five to 10 years too late for default fund scheme members. Most are lifestyle fund members and these funds start to switch into less risky assets up to a decade before they retire.
That’s why it’s vital to start talking to members at least five years before retirement: there’s not much point in switching into bonds if scheme members want an income drawdown product on retirement.
But even talking to members in the decade before they retire about what kind of product they want at retirement is too late. Up until this point, default members have been entirely disengaged from their pension provision.
Imagine the educational effort that will be required to communicate the range of at-retirement options. And making such an important decision will come as a shock to most members who have, up to that point, made few choices about their pension.
It would be far better if member engagement had been an integral part of a pension plan from the day of joining. Of course, higher levels of member engagement is more expensive for providers but it’s also an opportunity for providers to communicate key messages, such as how higher contribution levels can make a material difference to retirement income.
I’m not suggesting the industry tries, once again, to teach members the difference between bond and equity markets. Pension providers need to take on board the lessons it has learnt in recent years and focus on those important levers available to members, all of which focus on ensuring the best possible retirement income provision.
The abolition of the requirement of annuity purchase could be just the impetus the industry needs to create a truly sophisticated pensions provision – one that understands that many members are not engaged but for those who want to be involved, it can provide simple and important messages that result in very real benefits at retirement.