The pensions industry’s traditional focus on accumulation has served clients with a defined benefit (DB) pot well, as they are able to enjoy a steady income for life.
But now that the sector has started to see the first defined contribution (DC) retirees, that same framework is likely to fall short of providing consumers with the stability they need in later life.
Speaking at the Pensions and Lifetime Savings Association (PLSA) annual conference, attended by International Adviser, Aviva said that retirement products have not changed and lack focus on the later life stages, which is what DC members will require as opposed to their DB counterparts.
The insurer’s research found that flexibility is key for people looking to retire, with 65% wanting an income that lasts and 52% looking for a predictable income in later life. At the same time, there has been a rise in over-60s either entering retirement while on part-time employment, or pausing their retirement to go back to work, as many are worried their pensions will not last long enough or will not give them a suitable level of income.
That is why Emma Douglas, director of workplace, savings and retirement at Aviva and chair of the PLSA, said that ‘triple defaulting’ people saving for retirement – default contributions, default funds and default retirement age – is not going to cut it if the industry truly wants to meet members’ needs.
Aviva is currently working on a solution aimed at tackling those issues, said Laura Stewart-Smith, head of client engagement at Aviva Master Trust, as she announced that the insurer is developing a multi-pot retirement fund that will offer both the flexibility and stability retirees are not finding in current solutions.
Details
Aviva’s retirement strategy will consist of a three-pot fund to help members achieve a sustainable income for their lifetime.
The product will be split in:
- A 70% drawdown fund – which will cater for the first 15 years of retirement, when consumers feel they need the most flexibility;
- A 20% later life annuity – to provide a secure and guaranteed income for the rest of the retiree’s life; and
- A 10% cash fund, which the member can use for any occasional and/or unplanned expenses. This part of the pot will remain invested throughout retirement and may be used alongside any tax-free cash withdrawals, Aviva told IA.
The insurer’s model showed that the de-risking process for the fund would start at age 55, with a planned retirement age of 65, at which point the drawdown fund would start paying income, said Maiyuresh Rajah, head of investment strategy and propositions at Aviva. He added that there is some flexibility on the retirement age, as many members do not always retire once they reach state pension age.
But if the retiree was to die before the 15 year mark, they would lose the annuity portion of the fund, Rajah warned.
Aviva aims to launch the multi-pot retirement fund in 2023, which will first target the non-advised population, after the insurer found that just a third of consumers are willing to seek financial advice. The product would still be suitable for advised members, Rajah added, as well as to large/single employer trusts and master trusts.
Better outcomes
The insurance giant told IA that, while pension freedoms gave retirees flexibility on when to access their pots and what to do with it, they also face complex decisions and increased risk of making poor choices either at the point of retirement or when their financial circumstances change.
Many either cannot or don’t want to access financial advice, and for those the guidance available is often not enough to make informed decisions.
The insurer added that communication and engagement strategies will be key in ensuring members are aware of their spending levels and the impact these can have on their retirement outcomes.
Suzanne Rose, head of master trust and workplace proposition at Aviva, told IA: “We are excited to be developing what we believe could be an important new proposition for our pension members.
“Through our research we have found some people (47%) are not confident in planning for their retirement. It also came through that having an income that lasts throughout retirement is a top priority alongside a level of flexibility, which can be a tricky balance to achieve without support.
“It is in its early stages, but we believe this product will help to support retirees with the complex decisions they face when it comes to retiring.”
