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06

Pensions Institute warns on 'reckless' retirement reforms

Open-access content Monday 16th June 2014 — updated 5.13pm, Wednesday 29th April 2020

The Pensions Institute has warned that the government’s ‘reckless’ pension reforms risk turning private sector defined contribution funds into a savings scheme that will not provide an income for life.

In a highly critical report, the institute today claimed that the March Budget, which removed the requirement to purchase an annuity, was likely to lead to thousands of retirees running out of money in their old age.

It called for the development of a decumulation product - where accumulated assets during an employee's working life is used to fund their retirement income - to be integrated into auto-enrolment.

Pensions Institute director Professor David Blake said there was an urgent need to move away from retail decumulation products, such as individual drawdown and retail annuities, due to high costs and poor governance.

'It is essential that the decumulation stage of a DC is institutionalised in the same way that auto-enrolment has institutionalised the accumulation stage, rescuing pension savers from the high charges and poor investment strategies of retail personal pensions,' Blake stated in The consequences of not having to buy an annuity report.

'In a similar way, economies of scale need to be exploited in the decumulation phase to enable good value drawdown products to be designed for the early stage of retirement and good value annuities to be designed for the later stage.'

The report went on to demonstrate the complexities involved in estimating life expectancy and highlighted that, across all age groups, individuals significantly underestimate their remaining years.

'Without longevity insurance in later retirement the scenario is stark,' Blake continued. 'Even with the best planning, men will outlive their pension pot by five years and women by three.'

The report raised concerns that thousands of pensioners could end up 'double dipping', spending their pension savings quickly and falling back on state support. However, some individuals were likely to do the opposite and take excessive precautions by hording their pension savings, forfeiting a higher standard of living than they could have enjoyed.

In both cases, the report argues that annuities would help pensioners manage their spending better.

'The chancellor has forgotten the definition of a pension scheme, which is to provide retirement income for however long the member lives,' Blake added.

'In his bid to offer freedom of choice, he fails to recognise the key risk associated with every pension scheme. The optimal running down of assets in retirement is extremely complex. A minority of individuals might be able to manage some of these risks on their own, but this is a risky and high-cost strategy.

'Importantly, the chancellor must understand that it is impossible for an individual to manage longevity risk, except in extreme cases of terminal illness.'

This article appeared in our June 2014 issue of The Actuary .
Click here to view this issue

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