Shakespeare had a lot to say about money. It is littered throughout his work, from Julius Caesar to As You Like It, from Henry VI to The Merchant of Venice, and beyond.
In fact, the one consistent thread running throughout everything he wrote is a fascination – perhaps an obsession – with ‘coin’, ‘gold’, ‘money’. Twas ever thus, you might say!
Is it not a constant of life in any age or, indeed, at any age that ‘He that wants money, means, and content is without three good friends’? Certainly, it is for many people at present, who are suffering under the burden of cost-of-living pressures. And it is equally so for retirees at all times, who are the most exposed to financial shocks, particularly if they are reliant on defined contribution (DC) savings alone to provide their income in retirement.
Finding ways to help DC savers make the most of their accumulated pension savings is essential if they are to achieve good outcomes in later life. Cutting through the jargon, what this really means is:
- they don’t run out of money prematurely
- they don’t sacrifice their standard of living on the altar of prudence
- they can enjoy some flexibility in their income to deal with pressing needs or desires.
Innovation, what innovation?
The UK market has been slow to innovate to deliver product and investment solutions to meet these needs. Of course, the Financial Conduct Authority (FCA) intervened to set new rules in the retail and group personal pension (GPP) market in 2021 to require providers to deliver ‘Investment Pathways’ for people who enter drawdown on a non-advised basis. These pathways are intended to be suitable for those who plan to use their DC savings in one of four defined ways within the following five years, but they are inflexible, do not provide a clear strategy for members throughout retirement, and are not required in the trust-based sector.
Thankfully, the Government has returned to the decumulation question recently, setting out a potential framework that could facilitate significant innovation across the market. To achieve this, the Government is minded to place a new duty on trustees to offer decumulation services that are suitable for their members and consistent with the pension freedoms.
These are welcome developments and have the potential to facilitate innovation. In the first instance, the requirement for broad consistency across schemes proposed by the Government would introduce an element of competitive pressure into this market, which it has sadly lacked to date.
A brave new world
What these products and solutions might look like is the real question.
Providers are developing so called ‘to and through’ solutions that mix elements of flexible income with guaranteed amounts, but these tend to be structured around the age profile of members (i.e. retirees start in drawdown and move into an annuity product at a given age), rather than anything more sophisticated. The Department for Work and Pensions (DWP) is interested in exploring whether collective defined contribution (CDC) schemes have a role to play in decumulation provision. These are useful ideas but reflect the existing product landscape of the UK market, rather than moving beyond it.
Other markets provide a window into what an innovative future might look like.
To take one example, innovation in post-retirement products is more advanced in Australia, where legislation supports the development of deferred annuity products as well as ‘innovative superannuation income streams’, which are modern tontines where the income delivered varies according to the initial member stake, the pool’s mortality experience, and investment returns.
Similar innovation has taken place in North America. In 2021, the Canadian Government introduced legislation to permit what it calls Variable Payment Life Annuities (VPLAs). VPLAs are similar to insured annuities in as much as a member exchanges a lump sum for an income, but different because the monthly income paid can change depending on differences between assumed investment returns and assumed mortality in the annuity pool and actual returns and mortality experienced in the pool.
Thou shouldst not have been old till thou hadst been wise.
For a long time, it’s felt like this much quoted line from King Lear on age and wisdom was a prophetic foretelling of the struggles people have in the post-retirement market. If you have spent your life not engaging with your pension savings, how can you become an expert when you really need it?
Fortunately, the new age of innovation promised by recent developments in decumulation could take that burden off scheme members. But, to do so, the industry needs to look outward and embrace the experience of DC markets beyond the UK.
