Early responses to pension freedoms may look worrying, but they will not persist, pensions experts at Legal & General Investment Management have predicted.
A number of studies this year showed many retirees were using pension freedoms to transfer their pension pots into low-interest paying bank accounts, making themselves vulnerable to inflation risk.
But Simon Chinnery and Emma Douglas, head of DC client solutions and head of DC respectively at LGIM, said this was unlikely to continue.
“The early signs of what retirees are doing with their newfound freedom might initially seem worrying. So far, they have mainly been taking cash,” they said.
“However, this is largely because many retirees still have other income sources such as defined benefit pensions. As this changes over time, so too could the way retirees use their DC retirement pots.”
They added that a “significant percentage” of these retirees were “prudently re-investing” the cash into other investments such as Isas and property.
“Around 6.8m individuals have now been enrolled in DC pensions via auto-enrolment, and schemes are also now provisioning for companies with as few as ten members.
“This backdrop has led to 15 per cent annual growth in the UK’s DC market, which if sustained, could move it from £300bn to £900bn in under ten years.
“However, significant longer-term challenges remain, as most DC pension pots are currently small, with DC savings only sporadic at best before the recent introduction of auto-enrolment.
“Furthermore, contribution levels have yet to rise, amid a backdrop of stagnant wage levels in real terms. Generation X is therefore increasingly likely to be faced with a tough message: ‘work longer and save as much as you can.’”
While they welcomed the increase in freedom, Mr Chinnery and Ms Douglas pointed out that it brough with it greater personal responsibility. They also pointed to the risks of pension scams.
“There are risks, too, as highlighted by recent instances of fraudulent ‘advice’ being given to move pension pots into questionable international investments.
“Increased freedom, therefore, also necessitates a move towards better governance. By providing efficient retirement solutions for the full retirement journey, we believe we can help, and are noting a shift from single trust solutions towards a comprehensive master trust approach for smaller schemes in particular.”
They also pointed to the needed for better, more targeted guidance.
“The shift in investment strategies is my final trend for 2017. Following freedom and choice, there is greater uncertainty over what approach individuals will adopt come retirement.
“Schemes therefore need an investment that is well suited to being de-risked towards any of cash, annuity purchase and income drawdown. That said, if DC savers are likely to need to work longer then it could be important to remain invested for longer in a vehicle such as a multi-asset fund, as de-risking too early represents a key risk in our view.”
james.fernyhough@ft.com
