The Government’s “reckless” pension reforms risk thousands of retirees running out of money in their old age as it is “impossible” for individuals to manage longevity risk, a report by Cass Business School warns.
In a paper published today, Cass Business School’s Pensions Institute director David Blake – who is leading a Labour pensions policy review – is calling for a decumulation product to be developed to avoid a fallout from the radical changes to pension taxation announced in the Budget.
Blake says: “In his bid to offer freedom of choice, the Chancellor fails to recognise the key risks associated with every pension scheme.
“The optimal running down of assets in retirement is extremely complex. A minority of individuals might be able to manage some of these risks on their own, but this is a risky and high-cost strategy.
“The Chancellor must understand that it is impossible for an individual to manage longevity risk, except in extreme cases of terminal illness.”
The report says individuals tend to significantly underestimate their life expectancy, with men outliving their pension pot by an average of five years and women by an average of three years.
Blake says there is a need to move away from retail decumulation products, such as individual drawdown and retail annuities.
He says: “It is essential that the decumulation stage of a defined contribution scheme is institutionalised in the same way that auto-enrolment has institutionalised the accumulation stage, rescuing pension savers from the high-charges and poor investment strategies of retail personal pensions.
“In a similar way, economies of scale need to be exploited in the decumulation phase to enable good value drawdown products to be designed for the early stage of retirement and good value annuities to be designed for the later stage.”