New ‘flex first, fix later’ default post-retirement solution proposed

LCP partner and former Pensions Minister, Steve Webb, has called for an increased focus on post-retirement and announced the development of a solution aimed at improving post-retirement outcomes for defined contribution (DC) savers.

Speaking at the LCP DC and Financial Wellbeing Conference, Webb stated that policy attention on post-retirement had been “almost nil”.

“There is a sort of logical sequence; you can’t do anything until people have got pots,” he stated.

“You don’t really care about terribly much about post-retirement until they reach retirement and the pension freedoms generation retired in the past five or six years, so you kind of let policymakers off a bit, but now we need a post-retirement solution.”

In light of this, Webb proposed that a new ‘flex first, fix later’ default pension solution for people post-retirement should be considered.

The solution would start the retiree wholly or largely in drawdown, invested for growth, but would then switch in whole or in part to an annuity at a later age, with an opt out option if circumstances change.

“This could be the mass market default option for the millions and millions of people that have been automatically enrolled,” he continued.

“This is not to say that master trusts and providers are not thinking about this, of course they are.”

During the session, Webb pointed to four barriers to annuitisation in later retirement (inertia, cognitive decline, ensuring value for money and advice/guidance) that the solution would aim to overcome.

“How does this solve my four barriers?” he asked. “The inertia problem, fixed, because do nothing and you end up with an annuity that we think on average is right.

“In terms of the second one, thinking about cognitive ability, you are making your choice when you are hopefully that bit sharper.

“In terms of value for money there are some quite interesting angles here, because at the moment what happens is people go from a very collective environment, a master trust perhaps with millions of members, to the jungle when they are on their own. Well, what if you are part of this big, mass market product?

“We’ve talked to some insurers who have said ‘we could not just have an individual buying an individual annuity, but 10,000 of our customers this month hit their trigger age, we buy an annuity for 10,000 people and they get a much better rate’.

“On the fourth one, one of the challenges I think again is that if this is product of choice of default at retirement, we’ve got the nudge, we’ve got Pension Wise, we’ve got some kind of advice, of course it could all be better and there will be a lot of policy intervention there, but that’s the point where people are accessing support, advice and guidance, so let’s harness it rather than hope that they’ll access it at 80-something.”

Outlining the steps for the proposal, Webb noted that step one would consist of refining the modelling, followed by a forthcoming paper on optimal product design, then discussions with schemes and providers.

Concluding the session, Webb stated that he felt the post-retirement phase of the retirement journey was the big policy gap.

“It is a difficult area because it falls between government departments,” he noted. “We need joined up government here and we need to focus on the post-retirement phase.

“We want to see providers, master trusts and insurers engaging with us and policymakers to try and move this, what I hope you will agree is a good idea, to something that can actually benefits millions of people in practice.”

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