Most people aren’t that bothered. The frenzied response to the overhaul of retirement announced earlier this year has, I’m afraid, not been replicated around the watercoolers of Britain.
And why should it be when the industry itself seems no nearer deciding what the new landscape will look like? There is huge uncertainty surrounding where retirement will go from here, so it is welcome that Nest has taken it upon itself to start a conversation, unveiling a consultation on ‘The future of retirement’.
There are many interesting proposals in the document, but more important is the fact it is looking to promote an informed debate.
True, it has taken eight months since the Budget to get here and there are only just over four months until the new rules kick in, but the document Nest has put together could not have been knocked up in days and the auto-enrolment specialist should be commended for trying to spark some from of discussion.
By its own admission, it is in a fortunate position when it comes to being able to enjoy a bit more time. Its newness means any of its members retiring in the next few years will not have sufficient funds with Nest to face any major issue. This is likely to be true at least until the ban on transfers is lifted in 2017.
We will not lurch from one set of rules to the other on 6 April, and then stay thereEven if there may not be time for others to get much in place for April 2015, the evolution of pensions is going to be ongoing, along with this debate. We will not lurch from one set of rules to the other on 6 April, and then stay there.
And this is a debate that needs to be had, which will benefit the entire industry. But most providers responded to George Osborne’s announcements by scurrying off to work on new products or salvage what they can of the old ones, understandable given the short timeframes allowed.
As well as stepping up to start people talking, Nest has provided plenty to talk about; the consultation paper is punctuated throughout by good ideas.
Longevity insurance, for instance, which sounds like a viable solution to the problem of increasing life expectancy. Although it might need rebranding if it is not going to mark pensions out even more as a minefield rendered impenetrable by its over-reliance on jargon.
What is most striking within are the details of research that Nest has carried out about the public’s attitude to – and requirements of – pensions.
It identifies a changing need, as people have started to retire in instalments, moving gradually to part-time work and reducing hours slowly before stopping completely. This trend is established and will continue, but retirement income providers have not yet done anything innovative to reflect it.
The wave of new products expected in the run up to April should go some way to addressing this shift. After all, if products do not reflect what customers need, we can’t blame those customers for not being engaged.
One key challenge that must be overcome is the unrealistic expectations of most of those approaching retirement. It is one thing to blame providers for not reflecting the changing market in their product offering; but equally people are not reflecting those changes in the demands they make of a pension.
Research says most want a guaranteed income, rising with inflation that does not carry the risk of losing their pot. That will need a reality check.
As Nest chief investment officer Mark Fawcett himself identifies, the desire being voiced – albeit in plain English rather than Pensionese – is for an old-fashioned, index-linked annuity, the very product that the entire industry is scrambling to build an alternative to in light of the new freedoms.
The annuity they are unwittingly calling for would need to pay a much higher rate than is currently available but it does present an opportunity for providers. Given the trend for gradual retirement, pensioners could maintain an income-paying investment for the first part of retirement and then use the annuity to fund the last 10 years or so.
Funding the last 10 years of life is what annuities did well when people liked them. The trouble is they have never adapted to reflect the fact that we all live longer and those 10 years now start much later.
An annuity to fund 30 years of retirement is not viable, at least not at the rates achievable from most people’s pension pot. We need to get this through to the man on the street or else the new pension landscape and all its new possibilities, will just be faced with a continued disillusionment that people can’t have everything they unreasonably want.
While providers need to be imaginative in creating new products that go further, consumers also need to be a bit more aware of what is realistic. Expecting the moon on a stick for their 65th birthday will only lead to disappointment.
Nest initiating this conversation is a great start, but now we need to make sure the debate spreads beyond the industry and that we get real people talking about pensions in realistic terms.
It might help to explain to them that a pension can do all sorts of good – even if they can’t have it all.
