The Centre for Policy Studies (CPS) has proposed that “auto-protection” should be added to auto-enrolment schemes to prevent savers from running out of money later in life.
The think tank has suggested auto-protection would substantially reduce exposure to financial risks later in life, including premature exhaustion of savings, and would help protect the state from having to intervene in such a situation.
Auto-protection would have two components – “auto-drawdown” at private pension age and “auto-annuitisation” of residual pots at age 80.
Auto-drawdown would mean the saver would switch at pension age to income drawdown default of between 4 per cent and 6 per cent of savings a year.
The Centre for Policy Studies argued this would encourage providers to offer a low cost, diversified default fund for undrawn assets with economies of scale to help deliver larger retirement incomes than otherwise.
Auto-annuitisation would facilitate the collective hedging of individuals’ exposure to the unquantifiable risks of longevity and would remove later life exposure to investment market risks and cost of living inflation.
Michael Johnson, author of the CPS report, said that these measures should not be compulsory so to undermine the pension freedoms, and individuals would have the option to opt-out of one of both phases of auto-protection.
He added the introduction of auto-protection would address a “major policy inconsistency”, where the government incentivises people to accumulate retirement savings only to “desert them at the start of decumulation”.
"Any debate about what is the ‘right’ form of defaults at age 55 and age 80 should not be allowed to overshadow a more fundamental issue: the pots of most people at retirement are likely to be too small.
“We have to recognise that unless working life savings contributions are substantially increased, then many people are likely to run out of money before dying irrespective of the design of any retirement default."
In 2010 the CPS published a paper called “Simplification is key”, which argued that buying an annuity should not be mandatory, a proposal that came into law in April 2015.
In the paper the CPS said that the requirement to buy an annuity should only be done away with “provided that both the state and the individual were protected from downside risks”, which the CPS feels has been overlooked.
julia.faurschou@ft.com
