“Auto-protection” should be introduced to reduce pension savers’ exposure to financial risks in later life, the Centre for Policy Studies has proposed.

In a new report titled Auto-Protection published today 23 March 2017, CPS research fellow Michael Johnson (and author of the paper) noted that savers reaching the age of 55 should be automatically put into a default drawdown arrangement and annuitised at 80 if they choose not to do anything with their pots.

This initiative would be introduced to “complement” auto-enrolment to assist with possible premature usage of savings, help 55 year-olds unsure of what action to take with their pensions and would, in turn, help to protect the state.

Auto-drawdown would involve an income drawdown default of between four per cent and 6 per cent of pot assets per annum. Providers should be encouraged to provide a low cost, diversified default fund for undrawn assets to assist in growing retirement incomes, the report suggested.

Following this, Johnson discussed the possibility of auto-annuitisation of residual pots at age 80. This would enable the hedging of individuals’ exposure to longevity risks and would remove later-life exposure to investment market risks and cost of living inflation.

The report emphasised that the auto-protection proposal is focusing on risk management and “not the elimination of choice.” If the concept is taken on, Johnson said, members could opt-out if they choose to pursue alternative options in line with the pension freedoms.

Johnson mentioned that the paper is supported by the Trades Union Congress and a Conservative Peer. In addition, managers of large workplace pension schemes, including DC pensions, were “very supportive of the auto-protection concept, but cool towards the form of protection (annuitisation at the age of 55).”

“The introduction of auto-protection would address a major policy inconsistency, whereby the state nudges and incentivises people to accumulate retirement savings, only to desert them at the start of decumulation," Johnson said.

"Any debate about what is the “right” form of defaults at 55 and 80 should not be allowed to overshadow a more fundamental issue: the pots of most people at retirement are likely to be too small...We have to recognise that unless working life savings contributions are substantially increased (i.e. doubled), then many people are likely to run out of money before dying irrespective of the design of any retirement default."

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