Collaboration critical to solve challenges for the ‘DC dependent’ generation, says NEST

Collaboration among industry and consumers groups will be critical if we are to solve challenges for the ‘DC dependent’ generation, automatic enrolment provider NEST said today as it launched a consultation on the future of retirement and investing for its members.

Mark Fawcett, NEST chief investment officer, said:

‘With the abolition of compulsory annuities, the government has given the industry a once in a generation chance to start with a blank sheet of paper and really figure out, from the ground up, how to make DC savings work in retirement. The old binary debate between annuities and drawdown is no longer relevant. Instead we have an opportunity to look at how elements of each might be used to create more flexible solutions, fit for the majority of savers.

‘The solutions we as an industry develop over the next few years could determine the lives of millions of people in old age. We absolutely cannot afford to fail consumers who will increasingly have to make choices that will have fundamental impacts on their lifestyles in retirement. Leaving their retirements to chance is not an option.

‘Our members represent the new majority of savers who will rely on their workplace DC savings more than any previous generation; the 'DC dependent' generation must get the most out of those pots. This is a question that industry experts in the US, Australia and other countries are grappling with as well; and it’s not something we can solve alone.

‘That’s why we’re calling on people from the pensions industry, insurers, financial advisers, as well as consumer and employer groups, here and abroad, to join this conversation, test the evidence we’ve found and help design solutions that truly meet savers’ needs.’

Defined contribution savings, alongside the state pension, will become the primary source of income for millions of retirees in future, replacing defined benefit savings and compensating for lower levels of housing and other wealth.
Coupled with the end of compulsory annuitisation this creates an unprecedented landscape in which there are currently no suitable solutions for the vast majority of savers on moderate earnings.  

NEST is calling on experts here and abroad to help it examine the evidence on what consumers want and need, and find innovative ways to secure a better deal for the generation of 'DC dependents'  who will begin reaching retirement in the next few years.

Commenting, Lawrence Churchill, chair of trustees at NEST, said:

‘The changing nature of retirement and the new policy landscape creates an unprecedented situation for trustees and others working hard to ensure members get the best possible retirement from their pension pots.

‘We hope this consultation will start a debate about what members really need from retirement solutions and how we as an industry can meet those needs. NEST has put forward some compelling evidence in this consultation document. But we don’t have all the answers. We need help and we need to work collaboratively to develop solutions that put savers first.’

NEST’s consultation document draws together evidence of the challenges the industry faces and some of the developing thinking about new product design.  
Key themes that have emerged include:

• DC pension savings, which are currently not the primary source of income in retirement for most people, will become a key pillar of retirement wealth within 20 years
• the nature of retirement is changing, shifting from a one-off event to more of a gradual journey alongside later working
• consumers welcome the new freedom and choice they have but are unsure about the choices they’ll need to make and say they’ll want help
• consumers don’t understand that annuities are insurance policies but also don’t understand major aspects of traditional draw down products, including that their pot is invested and isn’t ‘guaranteed’
• consumers say the most important aspects of any retirement product are protection from inflation, a guaranteed income until death and protection from market volatility, although they don’t always make choices that reflect this
• people in general ‘want it all’ - guaranteed and consistent income punctuated by ‘bonus’ style lump sums from time to time - but many are unlikely to be able to afford this
• consumers are likely to be tempted by products that offer them more up front but could leave them vulnerable in later years
• on average people start thinking about planning for retirement far later than DC schemes have started de-risking their pots and evidence from the UK and around the world suggests many won’t engage at all
• financial planning in later life becomes problematic as cognitive functioning declines with age

The consultation also looks at the opportunities and constraints of retirement products on the market currently, including:

• the role of annuities in providing some of the features consumers say they value, such as guaranteed income for life
• how members might continue to invest through retirement and the challenges of balancing growth and protection
• mitigating the drawbacks of drawdown options, for example of the consumer carrying all the investment and longevity risk
• whether there is a role for increased risk sharing amongst NEST members

Download a copy of the consultation document here.