Redefining retirement income for the DC generation. Matthew Blakstad NEST Insight

Transcription

1 Redefining retirement income for the DC generation Matthew Blakstad NEST Insight

2 The policy context

3 How the UK saves UK occupational pension scheme membership (m) Private sector DB Public sector DB Private sector DC (..but what about low earners and self-employed?) Source: Office for National Statistics, NEST, Vanguard

4 Income from State Pension 1.5 Cost of retirement age benefits 17.2% of GDP Millions of individuals Source: ONS ,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 Annual equivalised household income ( ) 4

5 Freedom and choice DC pension system 5

6 So, what do people with moderate DC savings want to do with their money? 6

7 Income vs. cash Total membership 34% 6% 31% 9% 20% Higher Risk fund members 21% 16% 32% 5% 26% Expect NEST to pay me a regular income Will use the money in my pension pot to buy something from elsewhere Don't know - haven't really thought about it Don't know - don't really understand the options Don't know - as haven't decided yet Source: NEST survey into attitudes of active investors,

8 Preferred features of income Provides a regular income Certainty money won't run out Certainty of a regular income amount Potential for pot to keep growing Avoids ongoing investment risk Money can be passed on after death Ability to access cash lump sum % 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Not important Not very important Neutral Important Essential Source: NEST/Ignition House, 2015 n=79 8

9 So why don t people choose a guaranteed income? Limited time horizon Regret avoidance Unpredictable consumption Uncertain longevity

10 Income for life vs. flexibility A service that provides regular income for the rest of your life? 15% 32% 48% A service that is flexible meaning that you can change your mind during your retirement without penalty? 19% 37% 38% Important Very important Essential Base: All. 10

11 Hard choices Choose an investment fund(s) A whole universe of wildly different investment options Set an initial income level Rules of thumb ( 4% rule ), annuity benchmarks (index-linked/flat), P Monitor the investment performance & remaining pot r PV 1 1 r n? How frequently to check performance? How to interpret it? What does good/bad, enough/not enough look like? Review the investment strategy, asset allocation Bank the gains? Risk up to catch up? Hold the course? Review the income level Escalate with inflation? Keep it the same? Time to take a cut? 11

12 Helping disengaged members Savvy self-directors Financially capable Fully engaged in decision making Capable of making investment decisions Confused and concerned Disengaged Engaged in decision making Limited financial capability Understand the importance of the decisions Will need help to navigate choices Limited interest in decision making process Low financial capability May need pre-determined solutions to avoid defaulting into poor outcomes Majority of NEST members will need help Source: NEST/Ignition House,

13 Retirement blueprint principles 1. Living longer than expected and running out of money is the key risk in retirement and a critical input into retirement income solutions 2. Savers should expect to spend most or all of their pension pots during their retirement 3. Income should be stable and sustainable 4. Managing investment risk is crucial as volatility can be especially harmful in income drawdown-type arrangements 5. Providers should look to offer flexibility and portability wherever possible 6. Inflation risk should be managed but not necessarily hedged 13

14 U or non-u? Income Saving Consumption Dis-saving Source: economicshelp.com 14

15 b9978c90-9d79-11e7-8a c63 Real-world consumption: US $60,000 $50,000 Travel $40,000 $30,000 $20,000 $10,000 Apparel & services Entertainment Other* Transportation Food & beverage Education Housing (includes mortgage) Health care $ Age Median US spending: Chase banking data with estimated categorization of checks and cash 15

16 Real-world consumption: UK Source: International Longevity Centre, based on Living Cost and Food survey, Expenditure and Food survey ( ) 16

17 Steady, secure income for life the consumer experience Phase 1 - Flexibility - Change your mind with no regret - Pre-commit to lifelong income with option to opt out - Pass on pot if early death Phase 2 - Securing the future - Change possible but later life income secured - Access to liquid savings without reducing income Phase 3 - Security for life - Security and peace of mind of protected income - Access to liquid savings Source: NEST Retirement Income Blueprint 17

18 Under the hood Flexible income account Cash account Monthly payments Buy later life income Later life protected income Source: NEST Retirement Income Blueprint 18

19 Income stories JOHN'S STORY - CASH I ve decided to take my entire pension out, probably over the next five years. I ve taken the tax free lump sum to pay off the mortgage and have a little holiday. I ll take the rest out as I need. CATHY S STORY - ANNUITY I really liked the idea of a regular guaranteed income. I know exactly how much I am going to be getting in my bank account each month and I can budget around that. 5% 6% MARY S STORY - DRAWDOWN DAVE S STORY NEST APPROACH 11% I decided to leave my pension invested and get an income from it instead of buying an annuity. I don t like that the money is gone after death if you buy an annuity. I wanted a secure income for the rest of my life and the opportunity to access my money - if I need to, and leave some of it to my wife if I die. 77% Source: NEST/Ignition House, 2015 n=79 19

20 Final thoughts: trade-offs Drawdown optimised fund 4% income Drawdown optimised fund dynamic income Source: NEST internal modelling 20

21 Final thoughts: trade-offs The evidence suggests people are prepared to make trade-offs, eg: starting income and volatility drops of income in exchange for flexibility bonuses versus increasing income at risk We ll be testing these trade-offs in forthcoming research Work-in-progress stimulus materials for conjoint research 21

22 Thank you