What product innovation do we need in retirement?
Mark OrmstonDirector of PropositionsRetirement Line Find me on LinkedIn
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I’ve had the good fortune of working in the retirement income space for a decade. In that time, the topic of innovation has been a constant talking point. For all this talk, how much progress have we made, and what is yet to come?
Limited innovations since 2015Whilst no one has reinvented the wheel yet; we have seen some innovation in the retirement income space since the pension freedoms came in during 2015.
There’s the FCA’s investment pathways, master trusts facilitating multiple pot/bucket-based approaches and two annuity providers (Just and Canada Life) supporting annuities held within drawdown accounts.
The lack of anything more dramatic likely boils down to two reasons, either:
An appetite from DC retirees to simply access their tax-free cash; or
Retirees having so little in their DC pension that taking it as a lump sum makes the most sense.
In the future, people will have more complex retirement income requirements. Therefore, there’ll be a greater need for innovation.
CDC, now that’s a bit different!Fans of Collective Defined Contribution schemes (“CDC”) might be pleased to hear I’ve had two conversations with my postman about it to date! Neither of which were initiated by me!
I’ve garnered two key takeaways from these very pleasant conversations. Firstly, I have too much pension-related post delivered to my house. Secondly, my postman was very unsure of CDC. I explained how the offering might work in his favour, but he seemed unconvinced.
I’m not suggesting CDC is going to have a tough time off the back of a couple of conversations with my postman. However, in my humble opinion, CDC has to deliver noticeably higher income than an equivalent annuity, and people need to understand it (Consumer Duty springs to mind). It’s exciting to see a different type of pension launching, but there’re significant challenges to overcome for it to be the game-changer some people expect.
Buy now, get paid later Another topic getting attention is deferred annuities. Deferred annuities pay a guaranteed income for life, but payments don’t start until you reach a pre-agreed age. They seem to make a lot of sense in theory, and have good levels of take-up outside of the UK – Chile and Denmark both spring to mind [1].
So why have we not seen deferred annuities flying off the metaphorical shelves?
Several annuity providers tell me they’ve considered it. However, they struggle to ensure the product delivers value, sighting things such as solvency requirements and difficulty finding appropriate long-term assets.
Deferred annuities also face a cultural barrier. In the UK, buy-now-pay-later has become increasingly prominent (particularly with online shopping). Deferred annuities are the opposite of this, so it requires a drastic shift in mindset.
Another barrier being would a deferred annuity deliver a better rate than an immediate annuity? The annuity market is much more sophisticated these days; the vast majority of annuities purchased at the ages of 75 and older are underwritten using health and lifestyle information (over 80% of Retirement Line cases in 2021). So might most consumers get a better rate with an immediate annuity calculated on their own longevity?
Future innovation in the workplace marketI’m conscious I may be coming across as doubting the idea of deferred annuities, and I guess I am for the retail market. However, some of the challenges outlined could be overcome if deferred annuities were completed as bulk arrangements, offered as part of an overall pension income framework, or default offering.
Looking slightly further ahead, I think there’s a fair chance we might see some guided drawdown-type products come to market. These are likely to be offered via master trusts, which want to support customers with sustainable withdrawal rates. However, for me, there’s one key area I expect to see short-term innovation, and that’s pension income defaults (or whatever people would prefer to call them).
The path of least resistance – pension income defaultsNot only do I hear people within the world of pensions call for this sort of offering, but I believe the non-advised mass market is screaming out for it. I point to the power of the path of least resistance and general inertia as evidence for this.
Take my neighbour as a case in point. After I asked him how he decided to take his pension, his response went along the lines of “I got a letter, and they said I could have X; I just need to sign and date and send it back. So that’s what I did”. I assume all options were presented. However, to my dear neighbour, there was only one choice, the one the incumbent provider offered a return slip for. We need to make sure people who follow this path still get a good outcome.
Best of bothSo how might these pension income defaults be designed?
One approach might be to start 100% in drawdown and end 100% in an annuity. Personally, I’d like to be able to start with a bit of both and end with a bit of both, with multiple smaller annuity purchases along the way. I’m acutely aware this approach would be unlikely to deliver the overall highest income returns. However, it might provide an overall better customer experience outcome, as it mitigates against some of the potential downsides of full annuitisation or full drawdown.
We're eight years on from Pension Freedoms and I love that people working in the pensions and retirement industry keep striving for better. However, the potential for poor outcomes grows as each year passes. So there really isn’t a better time than right now for product improvements.
I hope my ramblings share the best ideas I’ve come across. Whether any come to fruition or not, we will have to wait and see. However, there’s one thing I am sure of; it’s a very exciting space to be working in.
