Consumers acting without advice or appropriate default investment solutions are at risk of making poor decisions at retirement, according to a Pensions Policy Institute report.
The influential think-tank says policymakers, regulators and the pensions industry need to address the “key risk” of disengagement and inertia in the pensions market ahead of April.
A qualitative study of defined contribution savers between 55 and 70 found a host of obstacles standing in the way of them achieving good retirement outcomes. These include an unwillingness to plan beyond the next few years, poor understanding of how to make assets last, a reliance on provider defaults, and the idea they could find “better” investments outside of pensions.
However, the study says once key concepts were explained to consumers – such as the benefits of illiquid assets and longevity insurance – they were open to making decisions that would lead to better retirement outcomes.
PPI author Melissa Echalier says: “The findings from the research were encouraging, in that while those with DC pensions were disengaged with the decisions they will need to make at retirement they were capable, when supported, of making some important trade-offs.
“These included trading-off their appetite for risk, the degree of protection they would like against rising costs of living in retirement, and the level of flexibility and ease of access they have to their DC pension funds.
“The risk is that without access to advice or suitable defaults in place they make poor decisions, which could include taking their fund as cash and placing it in very low return investments.”
Report sponsor State Street Global Advisors senior DC strategic Alistair Byrne says: “The industry needs to put in place well governed retirement income defaults that provide members with value for money and flexible access to their assets, without overwhelming them with complex choices.”