Workplace pension savers could see their retirement income increase by 20 per cent if the DC sector adopts a more innovative approach to risk sharing – which could include CDC solutions.
This was the main conclusion of a new report by Hymans Robertson, which is calling for “urgent action” from providers, regulators and the wider industry to stimulate reform around the way members access their pension savings.
The pension consultant says “longevity uncertainty” means many members are losing out on the option of increased income. It points out that it is now eight years since the pension freedom rules were introduced, but this has yet to result in any significant reforms to the way people access retirement benefits, with most members simply relying on drawdown.
Hymans Robertson says that with more people becoming reliant solely on DC pensions to fund their retirement the clock is ticking to develop some of the ideas around risk sharing into tangible solutions. This includes CDC options, as well longevity pooling and deferred annuities.
Hymans Roberston head of DC markets Paul Waters says: “To help members who are really going to need the increased income, the work now must be done now. Many members in this position will have moderate incomes and not be able to access advice so the industry must provide defaults that don’t require active engagement in the decision making by the member.”
He adds: “The various flavours of risk sharing must be supported with innovative thought and investment. With just a little more work by providers and schemes to design and implement new ways for DC pensions to be accessed, this problem could be solved.
“While CDC is one approach, it is not the only answer. Other options are available that have the potential to deliver more value to savers, at arguably lower long-term risk, and can be implemented today. The government and regulators’ single-minded focus on CDC risks missing the bigger picture. As an industry, we cannot afford to get this wrong for savers.”
The report – Risk sharing: an age old solution to an age old problem – outlines a number of options and risk sharing ideas that could increase the sustainable income people can draw from their pension pot, allowing them to plan their spending with confidence and reduce the risk of running out of money. This includes existing options like annuities and drawdown as well as CDC, longevity pooling, later life longevity protection and investment pathways.
Hymans Roberston senior partner Jon Hatchett adds: “Each year, UK retirees are ever more reliant on DC pensions. For most this income will be insufficient as they haven’t saved enough, and are unlikely to be able to, even if they increase their contributions now. It might be too late for those in their 50s and 60s to save enough, but not too late for the industry to help.
“Risk sharing can allow these people much better ways to manage the uncertainty of how long they will live, and for those that choose to prioritise spending while they are alive, increase their income in retirement by around 20 per cent.”
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