For those preparing for retirement, the way ahead has rarely seemed less clear, says Jesal Mistry, Legal & General Investment Management (LGIM)'s Head of DC Investments.
The legacy of the Baby Boomers is already enormous. From music and culture to assets and savings, they are one of the most successful generations of all time. Many of them are also lucky enough to have benefited from DB pensions so retirement decisions are more straightforward.
But, as the last of the boomers and the next generation approach retirement, some of their greatest hits resound a little louder than their knowledge about drawing down their wealth. Well before the upheavals of the last few years, pensions freedoms (whether you love them or loathe them) had already exposed a knowledge gap among those facing critical decisions on how to convert their retirement savings. Since 2020, the pandemic, global instability and cost-of-living crisis have only served to compound many savers' sense of uncertainty.
If soon-to-be retirees were muddled about their options in 2019, it's possible that 2023's crop feel downright lost. So how can those of us in the pensions industry help them to move forward?
Don't pass me by
For some years now, we at LGIM have worked on a range of tools to try to make it easier to navigate the complexities of decumulation. This included our retirement planner that helps people to visualise their futures using their own financial data on things like pot size and desired retirement age, not examples.
The introduction of the PLSA's Retirement Living Standards has also provided individuals with a useful ‘rule of thumb' around how much pension savers might need in retirement.
A lot of work has gone into trying to simplify the choices individuals need to make, for example we launched our Investment Pathways to all DC members approaching retirement. With some simple and intuitive messaging alongside the regulatory requirements, we have seen phenomenal success with over 25% of all retirees choosing one or a combination of Pathways.
Yet even with tools like these, pension scheme members can often be overwhelmed by the choices available and what it might mean to them. There are just so many issues to consider and, crucially, these vary from person to person.
For example, while we all might welcome increases in life expectancy, the issue of longevity is in itself a concern for people trying to decide how and when to take their pension savings. Will their pot last? Would an annuity serve them better or would drawdown be better for those with larger pots?
Meanwhile, the cost-of-living crisis might mean more workers simply feel financially unable to retire and plan to work for longer. And what of the gender pension gap which means that on average, women retire with pension pots half the size of men's?
The current generation of retirees have diverse sources of retirement income. Are they aware of the possibility of consolidating their wealth? Do they understand their options and the implications for their own circumstances of taking tax-free cash, drawing down an income, or buying an annuity?
We also know that many savers want to make bequests or put money aside for later-life care.
With so many variables to consider, we firmly support calls for better financial education in schools and in 2022 we partnered with charity RedSTART, which aims to transform the life chances of disadvantaged children. However, we also believe that education alone won't be enough.
Pension providers like us already offer seminars, webinars and presentations to clients and their scheme members, to provide guidance through the decumulation process. Many of these are well-attended but an overall lack of engagement is a perennial problem across the industry in enticing people to take an active interest in their own pension.
There has been progress in recent years, with industry campaigns such as Pensions Awareness, and employers, trustees and providers are always looking for ways to get members thinking more about their retirement needs.
It could be that auto-enrolment - which has had huge success in helping workers to save for their financial futures - has inadvertently led to a lack of connection between an employee and their pension scheme if they believe their retirement plans will unfold automatically without their input.
At LGIM, we know from our own member surveys that people feel more engaged with their pensions when they understand which companies their investments are with and how their money can make a positive difference. Our ESG work has been instrumental in this, such as our partnership with fintech company Tumelo, giving trustees and scheme members oversight of where their pension is invested and provide their views on the ESG issues they care most about.
We also welcome regulatory changes such as open finance, pot consolidation and pensions dashboards as ways to encourage more members to look more closely at their pension and how it fits into their overall finances.
In addition, there's free and impartial guidance from Pension Wise, paid for by the government, that offers appointments to anyone aged 50 or over with a DC pension. Yet, while the service has expanded significantly since its launch in 2015 from 60,000 transactions in 2015-16 to over 200,000 in 19-20, and while there is ongoing work to encourage greater take-up, it's clear that reaching potential retirees isn't easy.
Fixing a hole
We know from our own book of business in 2019 and 2021 that around 50% of members aged 65 haven't accessed their pension pot. We also know that there is greater uncertainty among members around retirement timing and accessing DC benefits.
Despite the tools available and the Pension Wise arrangement, there remains a big gap in the support available to savers at retirement between these tools and full financial advice. Many people see the cost of financial advice as prohibitive, and the current regulatory environment means that guidance can only be applied in a very limited manner. This means that even with fresh and engaging sources of information, not everyone will know how to apply the knowledge to their own situation without a helping hand.
LGIM's research into auto-enrolment in 2022 confirmed that some groups need more help than others in levelling the playing field when it comes to getting the best from their pensions. For instance, lower paid groups may not earn enough in a single job to be eligible to join a workplace pension yet are balancing one or more part-time roles to make ends meet. Women are often disproportionately represented in these lower paid groups as they juggle domestic caring duties with paid work that fits around their families' needs.
Strawberry fields forever?
Time and again our findings bring us to the same conclusion: that the answer to demystifying decumulation, promoting engagement and prompting action lies in the development of tools that use technology to help individuals understand their position and deliver appealing, simple and bespoke information to those who need it, when they need it.
We believe that a combination of the right tools and products, tailored to individuals will be a major step forward in encouraging members to take advantage of pension freedoms responsibly. Hopefully, these will help them to select the right option for them and achieve better outcomes when they're 64 - or whatever age they choose to retire.
Important Information: For professional clients only. Past performance is no guarantee of future results. The value of an investment and any income taken from it is not guaranteed and can go down as well as up, you may not get back the amount you originally invested. Views expressed are of LGIM as at March 2023. The information in this document (a) is for information purposes only and we are not soliciting any action based on it, and (b) is not a recommendation to buy or sell securities or pursue a particular investment strategy; and (c) is not investment, legal, regulatory or tax advice. Legal & General Investment Management Limited. Registered in England and Wales No. 02091894. Registered Office: One Coleman Street, London, EC2R 5AA. Authorised and regulated by the Financial Conduct Authority, No. 119272.
 Source: LGIM 2021. Member retirement choices report.
 See https://moneyandpensionsservice.org.uk/2020/10/05/pension-wise-appointments-see-23-increase-in-19-20/.
 See https://commonslibrary.parliament.uk/research-briefings/cdp-2022-0041/.
 See https://www.lgim.com/landg-assets/lgim/capabilities/defined-contribution/dc-retirement-solutions/how-auto-enrolment-can-prevent-a-retirement-crisis.pdf.