DC scheme members’ financial futures at risk, if providers don’t innovate with holistic products, warns Hymans Robertson
18 Oct 2022
DC pension scheme members need providers to focus more on innovation, to future proof their products and help members to make decumulation decisions, and avoid running out of money in the future, claims Hymans Robertson as it launches its report: The Decumulation market: opportunities for providers. The report examines the needs of the retirement market and shows that members in different income brackets, with different pension pot sizes, have different levels of understanding when it comes to decumulation, and highlights that providers can meet this need by taking a more innovative and holistic approach when developing their products. The leading pensions and financial services consultancy warns the industry that with new Consumer Duty rules due soon, providers are required to recognise members’ differing needs and also serve them no matter their pot size.
The research shows there is significant opportunity for providers to serve members better by making use of online tools to meet their needs. Members who are reliant on DC pensions as their main source of income should be helped to confidently answer the three key questions about their pensions: What have I got? Is it enough? What should I do next? Individuals who were questioned for the report had varying levels of understanding about their provider’s communication on pensions and this could largely be linked to pension pot size. Only just over half (59%) of members with pot sizes up to £100,000 understood the communications sent to them from their provider which compared to three quarters (76%) of those with pot sizes above £250,000 who said they understand communications from their provider. Only 62% of those with pots up to £100,000 felt they had access to all the information they need to make important decisions about their retirement, compared to 81% of those with pots over £250,000.
The report also highlights that providers could develop a variety of products, including some non-traditional, to help members avoid future retirement funding risks. As a little over a fifth (23%) of those with retirement pots less than £100,000, said they feel confident deciding which financial products suit their needs and while the figure for those with larger pension pots over £250,000 is greater, it’s still only just over half, at 52%.
Commenting on the need for Providers to take a more holistic approach to product development, Karen Brolly, Head of Products at Hymans Robertson said:
“Consumers need the right support, guidance and protection today; they cannot wait until the future. As an industry that is responsible for delivering good outcomes, providers have so much opportunity to evolve and deliver products that help DC pensions members better navigate their options. Our research has shown many individuals feel underserved by the information they receive at the point of retirement, and this impacts how confident they feel when faced with important decisions. As the retirement market continues to expand, the need for tailored guidance for the different circumstances’ individuals face is underlined.
“Ideally, individuals should be able to have retirement plans encompassing a range of different products like drawdown, annuity and other savings vehicles. And, while we recognise that they won’t be solutions for everyone, we believe that existing products such as equity release or newer ideas like longevity pooling could form part of the broad range of solutions.
“The role of strong communication is a thread that runs throughout the FCA’s new Consumer Duty regulation and is seen as a means of truly serving and empowering the consumer to enable them to make good financial decisions for their future. It also explicitly asks for providers to ensure they provide good communications, that are easily understood, tailored to customer needs and delivered at the right time to help them to make financial decisions. Providers need to ensure these regulations are met when developing new products.
“Although some of the developments we’ve highlighted will need to be achieved over a longer time scale there are key breakthroughs providers could push through now that would immediately support members in making better retirement decisions. Firstly, once Pensions Dashboards are fully operational, building in the ability to have all pension pots in one place would allow for easier integration and a smoother consolidation process. Secondly, providers and regulators could give individuals more information around what sustainable income levels might be for their specific pot size and retirement choices. Finally, there is an understanding that everyone will have a different retirement journey. Not only should providers take a much more holistic approach to retirement planning, but they should also give individuals more ways to consider all of their assets with a view to achieving their retirement income needs.”