We can all relate to being rewarded for something we have achieved, going right back to primary school. It is inbuilt in our society as a motivating force that gets the results we want. With this in mind, the recent launch of Vitality Invest provides food for thought.
As a protection provider, Vitality is well known for rewarding policyholders for healthy lifestyles. With Vitality Invest, it applies its incentive concept to investments, including retirement savings.
Clients in its Retirement Plan are encouraged to invest for retirement earlier and for longer, to maintain a healthy lifestyle and refrain from withdrawing too much too quickly through financial incentives such as bonuses. Those who also have a Vitality life or health product, which rewards efforts to stay healthy with things like cinema tickets and discounted air fares, can also benefit from discounted platform fees.
There is no denying that incentives fit nicely with the accumulation stage of retirement planning, where everyone essentially has the same aim of building up their retirement pot. But do they have a place at the decumulation stage, where individuals’ needs can vary greatly?
Vitality Life chief executive Herschel Mayers says the point of an incentive model is to change people’s behaviour in a positive way.
“We want people to be able to manage their money well in retirement and be healthier both pre and post retirement,” he says.
Mayers adds the Vitality concept is a shared value model: saving more in Vitality’s funds and staying invested for longer will generate additional fees for the firm, which it shares with clients in the form of incentives.
So what is the market verdict: much-needed innovation or gimmick?
Former pensions minister Ros Altmann thinks any ideas to help people retain more of their pension for later in their retirement and improve their health are worthwhile.
She says: “Some may see it as a gimmick, but I would see it as serving the customer’s best interests. More people will live longer and need money for their advanced old age, so encouraging them to keep it for later rather than spend it sooner is a sensible behavioural nudge.”
Mattioli Woods consultant Steve Eggleton sees clear health and financial benefits for clients in an incentive model like Vitality’s.
But he imagines it will take some getting used to. “Frustration could occur with getting to grips with complicated point systems, regular uploading of data online and the need for ongoing health checks.
“For most us come February our new year’s resolutions are a distant memory and we’ve settled back into our default settings,” he says.
“This means when advisers consider the suitability of such products it’s important for them to have an open and frank discussion around the client’s previous track records of adopting healthier lifestyle choices.
“Otherwise, we need to be prepared to have some difficult conversations where engagement in the programme has been less than satisfactory and the underlying plan costs begin to creep up.”
Few can argue against the aim to bring about better health and retirement outcomes. However, many see a problem with a “one size fits all” approach of incentivising people to withdraw less at the decumulation stage.
Encouraging people to live healthily when they are taking out protection policies makes perfect sense to Royal London director of policy Steve Webb, but he says it is less obvious how this type of incentive structure links to investment products.
“The right strategy for income drawdown should be based on an informed conversation with an adviser, not short-term, ad-hoc product features with terms that could presumably be altered at any time,” he says.
Zurich head of product development Rod McKie saysthere is a risk that monetising rules of thumb could lead to unintended consequences.
“There is a clear moral hazard if an incentive is at odds with what is best for a client and their individual circumstances,” he says.
“For example, if a customer needed to access drawdown savings to bridge an income shortfall until a final salary pension kicks in, the forfeit of the incentive may appear more of a penalty than the loss of a reward.”
“Decumulation is far more complicated than accumulation – any nudges or incentives need to be personalised to an individual’s circumstances and financial goals, as well as being flexible enough to cope with changes in a client’s situation without forcing them to transfer to a more appropriate plan.”
Many commentators have suggested it is financial planning, not product-based incentives, that will ensure people in drawdown enjoy a sustainable income in retirement.
“If people took proper financial planning they wouldn’t need product incentives,” says Ovation Finance chairman Chris Budd.
“With a bit of coaching to clarify what their future might look like and proper planning to create a path to that future, they will have clarity over what they can spend and when. No gimmicks on charges necessary.”
“I think clients would prefer a competitive charging structure rather than one which is loaded to be able to give discounts,” adds Mowatt Financial Planning director Will Mowatt.
He regards Vitality’s incentives as too complicated and feels they are not driven by more fundamental client needs, such as how much they need to support their plans.
“Sustainability will be about all their assets, not just a pension,” he says.
Vitality’s Mayers agrees with Mowatt’s latter point and says the firm is working with advisers to encourage the right behaviour among clients, whose ability to meet the targets for the tiered “retirement booster” bonuses depend on whether they have other sources of income.
Mayers believes Vitality’s charges are competitive even without the discount for holding one of its health or life policies, but he concedes the criteria for achieving the highest level of bonus – 50 per cent of the annual withdrawal amount – is tough.
To achieve this level of booster clients must withdraw no more than 1 per cent a year and attain the highest level, Platinum, on Vitality’s healthy living programme.
Mayers says this does not mean it is focused only on wealthier drawdown clients who can afford to delay drawing an income to reap the highest financial reward.
“The more achievable targets of drawing 2 or 3 per cent also provide a significant boost,” he says. Clients who withdraw 2 to 3 per cent a year qualify for bonuses of 6 to 20 per cent, depending on their healthy living status.
Time will tell if incentivising drawdown members to restrict annual withdrawals can work. In the meantime, Eggleton says it should be viewed with some scepticism.
“A well-considered financial plan will keep sustainability of pension income under review,” he says.
Adviser view: Lesley James, director, Simplified Money
In principle, it’s a good idea. I really like the use of incentives to try and persuade good behaviour. I’m not convinced this is a game-changer, but we do know that nudge theory works. Aside from auto-enrolment, it is good to see others starting to use such tactics. The drawdown version looks very interesting, but how well that 1 per cent Platinum level will go down is open to question. Incentives need to be achievable for them to work. This might have the unintended consequence of allowing the already very well off to benefit rather more than “Average Joe” who really needs it. But we shall see – this doesn’t mean it shouldn’t be tested.
Adviser view: Fiona Tait, technical director, Intelligent Pensions
Anything that draws attention to the importance of not overspending is to be welcomed and Vitality’s approach is a good thing. That said, where people
need their pension to provide an income for life, a more robust approach is called for, including cashflow modelling, which would provide a much better result. Simply encouraging people not to spend does not take into account their individual needs or give them any idea of how much their fund could provide for themselves and their families.