How can the DC sector better serve those with cognitive decline?

Those suffering from conditions like dementia find making financial decisions difficult

clock • 5 min read
Philip Smith says the adoption of proactive measures, innovative product solutions and supportive environments can empower those with cognitive decline
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Philip Smith says the adoption of proactive measures, innovative product solutions and supportive environments can empower those with cognitive decline

Philip Smith looks at the opportunity the DC industry has to make a positive impact on the lives of individuals facing cognitive decline and their families.

Managing your pension and making good retirement decisions are essential to maximising the quality of your later life.

For those suffering from cognitive decline conditions, like dementia, the task of making complex later-life financial decisions becomes exceedingly difficult. Individuals suffering from these conditions are likely to find it challenging decide on the most suitable approach to funding their care and other long-term needs.

There are currently around 900,000 people with dementia in the UK. The NHS estimates that the condition affects one in six people aged over 80. The magnitude of this problem is only expected to get worse. It is estimated that by 2025, the number of people affected by dementia will rise to over one million. Worse yet, the Alzheimer's Society predicts that by 2040, the number will reach 1.6 million.

As the number of older people with dementia rises, I believe it is crucial the pension industry offers more solutions to help individuals suffering from cognitive decline and those caring for them.

Providing these solutions has been a particular challenge for defined contribution (DC) schemes, where the focus on pension freedoms means that members may often need to make difficult financial decisions later in life.

Financial advice is now out of reach for many and even where advice is available, it is often extremely expensive. Those that need to make complex decisions on behalf of somebody facing the condition, or for themselves, need solutions that don't rely on expensive advice.

Current support for people with cognitive decline

With the numbers of people affected by cognitive impairment set to increase, DC providers will increasingly be required to support affected clients and their families throughout retirement.

As the number of people retiring with DC-only benefits rises, the industry will have to step up to the challenge of assisting those with cognitive decline, ensuring they receive the care, resources, and support they need to maintain financial security and quality of life.

We are at the beginning of that journey, and since pension freedoms were introduced in 2015, product innovation in post-retirement DC pension products has been modest.

So, what can the industry do?

Innovate in product design

Post retirement DC products have been largely static since the introduction of drawdown, relying on active member engagement with a high risk of poor outcomes in expensive individual solutions. The Pensions and Lifetime Savings Association's minimum product standards published in 2020 provide a useful outline of what the industry should be aiming for: 

  • The product should be designed to provide a sustainable income stream in retirement 
  • Flexibility to vary income and withdrawals should be included 
  • Protection against cognitive decline should be built in by avoiding the need for complex later life decisions
  • DC products should be overseen by an independent trust-based body or governance committee

At TPT we have been working on a solution that will enable the default investment fund to produce a sustainable inflation linked income through retirement while maintaining the flexibility to adjust income and capital withdrawals to meet unexpected demands. Crucially, there will be no need to make complex decisions about how much income the individual's fund can sustainably support or the asset allocation required.

Moving beyond sustainable default drawdown, the ability to guarantee later-life income may become increasingly attractive, although the industry has yet to find a way beyond individual annuity purchase, with potentially complex medical underwriting, to make this happen.

Could CDC play a role? 

A decumulation-only collective defined contribution (CDC) scheme could bring a number of benefits to DC retirees, with investment and longevity pooling removing the need for complex decisions and potentially delivering a better outcome than individual drawdown or annuity purchase. The recent DWP consultation on post-retirement benefits recognised this and trailed the requirement for DC schemes to offer access to a post-retirement CDC option.

For those suffering from cognitive decline, a fully managed retirement income solution is an attractive option, albeit recognising that it comes without the absolute guarantee of an annuity or the flexibility of individual drawdown.

With the potential of beneficial retirement outcomes, it will be interesting to see how employer demand shapes up for CDC.

Enhanced communication and education

As the numbers of DC members drawing income in retirement increases, those suffering from cognitive decline will need communications that are adapted to their needs.

Pensions are a relatively complex product, and providers can make a difference by adapting post-retirement communication channels to an older audience who may be making decisions with the help of a carer or family member. Clear and straightforward language, visual aids, and simplified processes can significantly aid comprehension and decision-making. Offering educational materials and seminars that address the unique challenges faced by individuals, with cognitive decline and their caregivers, can also foster a better understanding of the pension options available.

Supporting vulnerable customers

Pension providers can adapt their retirement processes and vulnerable customer policies to ensure appropriate levels of support.

Often, cognitive impairment appears later in life, so why not make raising awareness of the role a power of attorney can play in the retirement journey an area of focus? This would help individuals consider how helping trusted family members or appointed representatives could help in future decision-making processes in the event that cognitive decline becomes an issue later in life.

While all providers have vulnerable customer policies, how effective are these policies at identifying who may be suffering from cognitive decline? Could this be an area where artificial intelligence could be used to spot transactions or behaviours that might indicate cognitive decline and enable appropriate support to be delivered?

Conclusion

As the number of people facing cognitive decline grows, the DC industry has a meaningful opportunity to make a positive impact on the lives of these individuals and their families. By adopting proactive measures, providing innovative product solutions, and fostering supportive environments, we can empower those with cognitive decline. This could pave the way for such individuals to maintain financial security, dignity, and a sense of control over their lives during their retirement years. By working together, we can create a more inclusive and compassionate retirement landscape that leaves no one behind. 

Philip Smith is DC director at TPT Retirement Solutions

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