Free-spending older workers splurging their retirement savings on holidays and luxury goods will make employers question why they are offering workplace pensions says Barnett Waddingham.
Speaking at a seminar in London this week, Barnett Waddingham partner Damian Stancombe warned employers could move towards offering nothing more than the auto-enrolment minimum, as has proved the case in Australia, if employees start using their pensions for discretionary spending in their 50s and early 60s rather than relying on it for an income.
Stancombe said: “In Australia they call them the Grey Nomads – retirees taking to the road with their caravans. In the UK we’ll be calling them Saga louts – Benidorm is going to be a fun place to be. Employers are going to start asking why they are funding a gold-plated pension scheme if their employees are using it to buy a Lamborghini.”
Speaking at the event, Pan Trustees independent trustee Roger Mattingly said the freedom and choice changes would bring welcome relief to DB schemes if there were a high level of transfers.
Mattingly said: “From the DB point of view, this is almost like an ETV exercise without the enhancement. DB liabilities will be in better shape as a result, and any relief is hugely welcome.
“Should employers welcome freedom of choice? It could change the landscape of people’s careers. We could see people taking as much as they can at 55 and leaving the workforce, and then wanting to come back again at 65 when they have spent it all. The two main drivers of human behaviour are greed and fear. We may see people lurching from a superb lifestyle to thinking ‘oh my god, what have I done?’”
At the event Barnett Waddingham launched its GEM (Governance, Engagement Monitoring) analytical tool, which helps employers and trustees understand the profile of their workforce and scheme membership to enable them to better match investment strategy to meet the new range of potential targets created by the new pension freedoms, based largely on fund size.
Barnett Waddingham partner Mark Futcher says: “We no longer see DC as a pension vehicle. People now need to be educated in the need for long-term savings for retirement. People need a short, medium and long-term investment strategy. Those with less than £30,000 will probably take it as cash. Those with a lot will leave it invested. For the squeezed middle between these groups we have built GEM to ensure their investment strategy is more suitable. You can still have a single growth default, but it can’t be a single default.”