In their recent report, How important are defined contribution pensions for financing retirement?, the Institute for Fiscal Studies (IFS) highlighted the need to support individuals in making the right choices about accessing their DC pensions at retirement.

Learning from the success of auto enrolment

The introduction of auto enrolment, combined with falling DB pension participation for younger generations, means there’s a growing number of savers who will rely more significantly on their DC pensions wealth when approaching retirement. It’s crucial that there’s support available to members to ensure they make the right choices about accessing their pension. It will help avoid misguided decisions which could impact their standard of living in retirement.

The success of auto enrolment suggests that active engagement isn’t necessary for the accumulation phase. However, lack of engagement can be a barrier to members making the best decision for their circumstances at retirement. Stronger support is needed for members from the pensions industry to deliver better retirement outcomes.

Supporting members at retirement through better guidance

The IFS also call for stronger nudges towards guidance to support members in understanding the options available to them when accessing their pensions. Organisations such as Pension Wise are already having a positive impact on the members who make use of the appointments. But it would be good to see future policy recommendations introduced which explore trialling automatic booking of 1:1 guidance MOT sessions for all individuals approaching retirement. 

I would encourage savers and their employers to consider other options and explore if more expansive guidance is required. Future savers will have multiple sources of income, this could include DB pensions and wider wealth, so it’s important to take a holistic approach. Guidance services will need to account for this to support members.

Inclusion of wider wealth

Property wealth is included in the IFS analysis. But should this wealth be viewed in a similar vein to other sources of wealth such as savings, DC, DB and State pensions? I think this should be treated with caution and question whether the IFS report is suggesting that property wealth could be used to fund retirement. I believe that by including property wealth, it dilutes the role that DC pensions will have to play in the future to support an individual’s retirement income.

As individuals’ DC wealth becomes a larger proportion of their overall wealth, it’s important that members understand the flexibilities and products available. The industry is already tackling this, through digital innovation and the creation of robo-tools for decumulation planning. However, for some individuals, accessibility to products with a guarantee (or those that utilise longevity pooling to ensure that savers are protected from longevity risk) will be required. The development of such products should be considered.

The government alone will not be able to force all improvements in member outcomes through policy change. Engagement with providers to drive product innovation, employers to review scheme delivery, and regulators to provide guidance will also be needed to improve the outcomes of future pensioners.

If you would like to discuss further, please get in touch.

This blog is based upon our understanding of events as at 5 July 2023. It a general summary of topical matters and should not be regarded as financial advice. It should not be considered a substitute for professional advice on specific circumstances and objectives. Where this blog refers to legal matters please note that Hymans Robertson LLP is not qualified to provide legal opinion and therefore you may wish to obtain independent legal advice to consider any relevant law and/or regulation.

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