PPI: Disengagement and inertia ‘key risks’ in pension reforms

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.”


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There are 4 comments at the moment, we would love to hear your opinion too.

  1. All this talk of defaults, yet no mention of the single most important and fundamental default that should be mandated by the FCA ~ OM. Why won’t it?

  2. An even bigger risk bothering me is the prospect of a deluge of pension liberationist get rich quick scammers. Not just the risk of a lower value pension, but no pension at all.

    The cold calling has started already, as noted by a couple of industry insiders in receipt of such calls.

    One of the payingtoomuch team has blogged details of the one he received and investigated. (If you want to see: http://www.payingtoomuch.com/blog/2015/1/12/ripped-off-at-retirement-the-risks-of-the-new-pension-reforms.aspx#.VLjidHbsI1Y). Investigation road led from Macclesfield call centre to Gibralta.

    Also Roger Edwards formerly of Bright Grey fame (and now http://makesensepartners.co.uk) warned on Tuesday he had an “International” call the other day leaving a robot voice informing that the pensions rules are changing…..anyone think it a good idea to call that one back?

  3. I like that the report says the clients rely too heavily on provider defaults and the provider response is “we need to put in place defaults”. I know people are disengaged, but the answer is not to say, we think this works for the vast majority of the population – try it. None of us would consider spending money on anything else in this way – and the importance and individuality of retirement is too important to rely on just doing what everyone else does. The correct answer is to engage people with their own money and their own lives.

  4. The challenge is trying to get people to engage just enough to show that a little bit of extra knowledge does go a long way. If those who are contemplating removing their pension funds, suffering the tax and then either investing in cash or buy-to-let spent a little bit of time understanding their options, their choices may be very different.

    However, whether the provider or intermediary is building this particularly helpful ‘water trough’, you cannot always get that particular ‘horse’ to drink at it. I am all for being positive about providing information, but sometimes a little fear of the unintended consequences might be in order.

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