The Association of British Insurers (ABI) has been on a mission to simplify the language used to describe retirement options, and we’re sometimes asked what other jargon we can eliminate.
Well, here’s one policy buzzword I’d like to see less of - defaults.
Given the remarkable success of automatic enrolment to date, policymakers and commentators have been keen to apply ‘default’ solutions to the retirement market, and used the word ‘default’ when they actually mean something else.
There is also confusion about what we mean by ‘defaults’.
A default is a pre-set option that a customer will enter without taking any action, but the term is often used to mean something else, like a standardised product or the choice that most people take.
In the retirement market, there are some decisions a customer must make themselves, especially about when they want to take their pension and how long they want it to last.It is obviously true that there is a disconnect between the policies of automatic enrolment (which removes the need for decision-making about saving into a pension) and freedom of choice (which requires complex decision-making about withdrawing from a pension).
But it is wrong, and over-simplistic, to resolve this disconnect by simply copying and pasting defaults as a solution.
To take an analogy from a different policy area - if an opt-out system is seen to work well in encouraging people to donate organs after they die, this might lead policy-makers to believe that an opt-out system should therefore be applied to encourage people to donate blood while they are alive.
Of course, that wouldn’t work – they are fundamentally different policy problems, because one requires an active decision by the individual.
Similarly, in the retirement market, there are some decisions a customer must make themselves, especially about when they want to take their pension and how long they want it to last.
No retirement option will be right for everyone – unlike the saving phase, customers have very different needs and objectives in retirement, taking into account their health and whether they need to provide for dependents.
The fact that people are driven by their individual needs means that retirement defaults are not always that powerful.
The power of large, enticing numbers is illustrated by the volume of transfers out of DB schemes to access an immediate lump sum, over the default of an indexed guaranteed lifetime income.
The power of norms is illustrated by the vast majority of people taking their state pension as soon as they can, when the default option to defer may be better for many.
Retirement decisions are complex, and providers need to be able to develop their own solutions for customers who do not engage. Defaults could be part of that solution: providers could offer flexible income customers a default investment fund or a default withdrawal rate.
Customers should also be nudged to use guidance services, but these interventions are a backstop at best and will be most effective when they are in pursuit of a clear overall goal for retirement.
To get customers to a position where they have such a goal, there needs to be support for everyone to navigate these decisions, and providers need to be more confident that they can present these options without giving a personal recommendation.
The ABI is exploring what interventions in the retirement market will get customers the best chance of a good outcome.
But it needs a range of policy tools, and default products should not be the default option.
Rob Yuille is head of retirement policy at the Association of British Insurers
You can hear more on this topic at the ABI’s upcoming Retirement Intervention and Innovation event taking place on 26 April in London. To register for the event or for more information, click here.
