Partner Insight: Learning from global leaders in lifetime income

Since 2012, the U.K. has made significant progress in encouraging people to save for retirement through auto-enrolment and removing barriers for participants. However, this has not solved one of the most significant remaining challenges — creating an automatic pathway which allows members to convert their hard-earned savings into income that is both adequate and sustainable over a retirement that could last 30 years or more.

Drawing on evidence from eleven countries including Switzerland, Chile and TIAA's century of voluntary annuitisation in the U.S., new research from the TIAA Institute examines how policymakers, providers and trustees can convert accumulated savings into lasting retirement security. While a mandate may not be feasible, evidence suggests that integration can still drive meaningful adoption of lifetime income products.

Lessons from Switzerland and Chile

Two countries in particular have taken steps to address the challenge of annuitisation adoption through integration rather than mandate; Switzerland and Chile. Both have achieved annuitisation rates of 55–60% among eligible retirees — roughly six to eight times what the UK, the U.S., or Australia currently see.

In Switzerland, members retire with a single consolidated account, held by their final employer's occupational pension scheme. They choose between a full annuity, a lump sum, or a combination of the two. Annuity is the default — if a member hasn't engaged by age 70, income payments begin automatically. Approximately 55% of Swiss retirees annuitise at least part of their balance, with 42% opting to convert the full amount.

In Chile, before a retiree can access savings in any form, they must obtain quotes from SCOMP, a government-run exchange that generates standardised, comparable quotes from every provider simultaneously, for annuities and programmed withdrawals alike. As a result, around 60% of eligible Chilean retirees end up with a lifetime annuity.

TIAA: A century of voluntary annuitisation

A closer comparison to the U.K. situation may be found in the U.S. — a system where annuitisation is voluntary and where there is no standardised national framework for retirement income.

TIAA serves as that point of comparison. It has been integrating voluntary annuity products into U.S. workplace retirement plans for over a century. About 30% of its members annuitise, far above the U.S. national average of 3–12%, because the option to annuitise is part of the default pathway rather than something members must seek out independently.

80% to 95% of TIAA members who annuitise do so within a year of retirement. This indicates that they make the decision when they are focused on retirement and have the resources and advice to make an informed choice.

Implications for U.K. retirement plan design

The lessons to be learned from the research are focused on a few key areas, where plan design decisions can potentially have a significant impact on member security in retirement.

The TIAA research shows that removing friction from the process of selecting lifetime income is key. Integrating the process of turning retirement savings into income so that it is just as easy as other options will encourage employees to consider it. When coupled with best practices such as consolidating account balances, clear member communications and transparent pricing, this will encourage retirees to make decisions that are appropriate to their circumstances.

While retirement planning should ideally start several years in advance, in practice, the point at which employees are most engaged is when they are evaluating their options and considering their entry into retirement. This implies that key decisions should be concentrated at or near the point of retirement, not deferred to a later age when members will be much less likely to engage.

It is important to design annuity products to avoid employees inadvertently choosing unsuitable products and later regretting their irrevocable decisions. Annuity features such as survivor benefits and guaranteed payout periods as the default, combined with minimum balance thresholds for annuitisation are important to protect against user error.

Global lessons for U.K. policymakers

Legislators in the U.K. have taken important steps towards resolving the question of how to integrate lifetime income into DC retirement plans. The question now is how to design these automatic pathways so that members will be able to make the right decisions for their personal circumstances and set themselves up for lasting security in retirement.

Sophie Ballard

Head of UK Institutional

Get in touch: [email protected]

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