Amid concerns many investment solutions are failing to ‘remember the members', Stephanie Baxter asks what good drawdown products should look like.
At a glance
- Drawdown investment solutions cannot be a cure and products must be built around member experience.
- Investment industry needs to factor in the increasing demands on trustees to engage with members.
Having good investment solutions in a defined contribution (DC) scheme is crucial to ensuring members build big enough pots to last through retirement. Yet in the post-retirement world, shiny investment products are not a panacea to the challenge of ensuring savers have good outcomes.
The investment industry has a huge task on its hands to innovate drawdown products that are flexible to meet the diverse needs of retirees as well as protect them from bad choices.
It was a much-discussed topic at the National Association of Pension Funds investment conference where NEST chief executive Mark Fawcett spoke about the master trust's experience. He said: "We're hearing that people will be pretty daunted by the opportunities and risks they're facing. It's like crossing a bridge with no guard rails, which looks pretty scary. We don't want to prevent people from crossing the bridge but they need some help to achieve good outcomes in retirement."
He believes having good default pathways in the decumulation stage is crucial to facilitating this. They would give flexibility in the early years with guard rails and provide later life longevity insurance. The US is already developing structures of default drawdown followed by later life annuitisation while Australian super funds are creating mortality pools through collective DC in decumulation.
Remember the members
Despite the obvious need for drawdown products to be built around member experience, there are concerns that a lot of firms are focusing purely on investment solutions.
RBS head of group pensions Carol Young shares this concern; she believes products that support and engage members are crucial as the lure of cash is "very strong". That is evident in the case of RBS, where despite offering a non-contributory 15% employer contribution with a big focus on engagement, around three-quarters of members are saving 4% or less as they can take the other 11% in cash.
She said: "As we look towards freedom and choice and how the investment community thinks about how we retain assets, we really need to think about how we encourage people to remain invested when it becomes possible to access their investments as cash.
"It is no use designing drawdown products that optimise from a pure investment perspective if you haven't considered how they will be implemented within an engagement framework and explained to members."
She warned trustees would not warm to products that fail to do this.
"If you turn up with an investment piece that has a radically different shape, it doesn't matter how beautifully designed it is, those of us who are working with and bearing the responsibility of the members will not have the luxury to change the whole game so we can fit that piece in," she said.
Given that governance budgets are "strained to the max" by the pace and scale of change, Young urged the industry to help funds implement these changes in a "holistic way".
Rather than turning members into investment experts, it is about developing investment solutions that recognise the context in which they're implemented. This would help members to understand what they are doing.
This is at a time when many companies are concerned that spending money on providing an in-house or outsourced drawdown solution will not stop people from making bad decisions. The fear is that at 55 employees access their pensions and begin to draw them down during a flexible workforce pattern but end up running out of money and have to work longer than expected. "As an employer, what was the point in taking the pain?" said Young.
This is her reason for making a big plea for engagement with members. "That's why particularly in drawdown it will be important to design things where people truly understand how long they are likely to live, how long their money is likely to last, and the consequences of their actions," she said.
Deciding on good principles
This will require a lot of innovation from the UK investment industry, which will not happen overnight. Many providers are understandably wary about being the first movers and it will be prudent for firms to avoid rushing the development of drawdown products. Fawcett believes the first step is to discuss and agree on good principles before designing default pathways.
Alliance Bernstein head of client relations pensions strategies group Tim Banks added: "We're at a point where we really need US safe harbour principles. That's not to say we should be prescriptive but we should all sign up to what we think are good principles. Let's get all stakeholders signed up to this so we can move forward."
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