We know that the accumulation phase in retirement saving is getting longer.
But that shouldn't mean that when individuals finally get to decumulation the help they get from a pension provider just slips away.

As Professor David Blake of the Pensions Institute reminded a Friends' Global Forum recently, "effective retirement saving needs an efficient decumulation phase as well as efficient accumulation".

Some smart thinking is needed about managing income throughout much longer lifetimes. The ABI is currently advising the Government that restrictions on defined contribution (DC) decumulation need to be reviewed to enable people to get the maximum value from their retirement savings.

Meeting the huge challenge of longevity gains is tough enough already without being hampered by fossilised pension regulations.

New thinking
Professor Blake has some interesting things to say about how people make economic and financial decisions.

This has led to new thinking on how to influence people to reduce consumption now in order to have a comfortable income in future. He's absolutely right when he says that the problem will get worse if no action is taken. Individuals are not inclined towards the level of self control needed to defer consumption. We know too that financial decisions are becoming more complex; young people, in particular, have the spending habit. According to the Wealth & Assets Survey 2006-8, the 16-24 age group has the strongest spending urge, but this declines steadily with age and falls away steeply after 55. Some of the latter is unlikely to be voluntary.

To be fair to those who would rather accumulate goods than retirement savings, they don't have the professor's exceptional knowledge of longevity risk. The increasing evidence of poverty in old age may go some way to changing their minds about this, but at present behavioural biases such as inertia, fear and just following the crowd can skew decision making away from good economic choices.

Adaptation
The industry is getting to grips with this by working with the biases. Core fund ranges, auto-enrolment, automatic increase of contributions, good default design and automatic de-risking near retirement are some of the methods being used to improve accumulation. But what happens when accumulation stops?

Looking at decumulation through a behavioural lens reveals a couple of useful questions: how do we design retirement strategies for those who are inclined towards spending too quickly in retirement and those who spend too slowly? The question is linked to restrictions on how accumulated retirement savings are run down.

Some will say that no Government should interfere in decisions about how individuals spend their savings, but this is to ignore the benefit of tax relief on those savings, and the unavoidable cost of providing state support for those who have scoffed the 'nest egg'.

Review
Some constraints will be necessary but the current restrictions are overdue for review. More flexibility is required to enable people to plan for the end of full-time working. The ABI proposals (Time for Change: Seven proposals to improve DC pension benefits in retirement, January 2010) include encouraging the development of 'value protection annuities' and products that provide a lifetime income guarantee.

Professor Blake suggests that gradually purchasing annuities over time might be better than the all-or-nothing choice. Individuals can then avoid the risk of crystallising all their funds into annuities at a point when the investment market and annuity rates could be unfavourable. This would allow advantage to be taken of potentially higher investment returns in the future and allow for changes to mortality rates.

Decumulation strategies now have to take into account the varied nature of future retirement and how income needs will vary significantly after full-time work.

There may be periods when a small pension is needed to supplement income from part-time working, for instance, and periods when a full pension is needed to enable a retiree to travel. Scheme members should be encouraged to plan their income needs over the whole of their lifetime.

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