Without access to advice or suitable defaults in place, defined contribution savers will make poor decisions, a report from the Pensions Policy Institute has found.
The organisation’s latest research found the Budget freedoms popular with DC savers, but concluded that once they begin to understand the full scale of choices and trade-offs involved in deciding how to access their pots at retirement, they will quickly become daunted.
According to the PPI, this suggests that disengagement and inertia among consumers from April is a key risk without the provision of effective default strategies, along with appropriate guidance and advice.
Melissa Echalier, author of the report, explained that while DC pension savers were disengaged at the moment, they were capable when supported, of making some important trade-offs.
“These included trading off their appetite for risk, the degree of protection they would like against rising costs of living in retirement, and the level of flexibility and ease of access they have to their DC pension funds.
“The risk is that without access to advice or suitable defaults in place they make poor decisions, which could include taking their fund as cash and placing it in very low return investments.”
Alistair Byrne, senior DC strategist at State Street Global Advisors, said it was clear that default investment strategies in DC plans need to cope with uncertainty around when people will retire and how they will access their retirement savings.
She said: “The industry needs to put in place well governed retirement income defaults that provide members with value for money and flexible access to their assets, without overwhelming them with complex choices.”
Earlier this month, JP Morgan Asset Management told FTAdviser that further evolution of DC default funds is needed.
Darren Philp, director of policy and market engagement at The People’s Pension, added that there is a danger people will feel overwhelmed by the complexity of decisions about how and when to retire.
“After all, these choices are some of the hardest financial decisions people will face. This is why the guidance guarantee is an essential part of these reforms.
“A pensions register, which would bring savers’ pension information together on one website, is essential to the success of the guidance guarantee but it would also drive wider engagement with pensions.”
emma.hughes@ft.com
