Delivering for the silent majority – Tim Banks

The big challenge is not getting people out of a default mindset as they approach retirement, but creating solutions that acknowledge their desire not to decide, says AllianceBernstein managing director, pensions strategy group Tim Banks

As we progress through the biggest shake-up in the UK’s private pensions system for a generation, we think the ongoing preoccupation with guidance provision may be missing the point. 

We believe that for too long it has been assumed that more information and independent advice are bound to ensure that people will start to make retirement planning choices earlier in the savings process – even when retirement itself remains a distant prospect. 

This year has seen lengthy consultations about the next phases of DC pensions reform. But some of the most important decision-makers have been left out of the debate – those people actually saving in DC pensions schemes. 

We sought to address this shortcoming by conducting an in-depth survey with 1,000 DC savers aged over 40. This yielded some revealing results.

Our survey and recent behavioural data showed that more than three-quarters of savers have yet to decide how they will use their pension pots once these become accessible. 

The survey also found that a mere 9 per cent of savers approaching retirement – those aged between 55 and 64 – know exactly when they plan to access their pensions. All this suggests that it remains exceptionally difficult for people to make definitive choices about their pensions goals.

While we would not suggest that more information and independent guidance will not prove crucial in the years ahead, we do not think they represent a panacea.

In our view, the decision not to decide actually represents a conscious choice. Therefore, the fact that so many DC savers remain in the undecided camp should not be regarded as a systemic failure that will be resolved by enhanced guidance provision, but instead as an accurate reflection of savers’ intentions.

People do not necessarily know whether they will be able to continue working full-time right up to retirement, or indeed whether they may choose to join the growing numbers of those continuing with some form of employment well beyond traditional retirement ages. 

People in work tend to be too preoccupied with their current job to be able to think about abstract concepts such as life in retirement, particularly given uncertainties around their health and where they may want to live.

It seems striking that 87 per cent of our survey respondents said it was important for them to retain flexibility over how their pensions savings are deployed. These respondents have not yet made up their minds about savings strategies but expect to retain the right to do so at later dates. 

In other words, people do not seem principally to be seeking more information – instead, they simply want more time to decide.

Many savers seem to regard ‘not deciding’ as their right, with a clear majority – 57 per cent – of survey respondents aged over 55 saying they plan to wait until retirement, or even just afterwards, before deciding how to use their pension pots. 

In our view, these savers should not be disadvantaged for choosing to wait and see.

The ‘wait and see’ bias represents significant challenges for trustees and providers. How can they decide on the optimal choices for savers when savers do not seem to know what they want? 

There is no easy answer but we think part of the solution lies in keeping communication channels open – savers must be kept fully abreast of the pertinent facts before choosing to stay with the status quo.

With more than 80 per cent of current DC savers sticking with default strategies during the savings phase, it seems logical to assume that we will see a lot of people opting to default when they reach the retirement income phase. 

In our view, getting people out of a default mindset is not the answer. Instead, we need to see greater focus on what is likely to be a sizeable majority of people whose preferred option is inertia.