The Centre for Policy Studies has proposed Auto-Protection to complement auto-enrolment. This would have two components:
• "auto-drawdown" at private pension age (currently 55, but the report recommends rapidly raising to 60), in the form of an income drawdown default of between 4% and 6% of pot assets, per annum.
• "auto-annuitisation" of residual pots, at age 80.
The objective, the authors of the report said, is to substantially reduce exposure to financial risks in later life, including premature exhaustion of savings, thereby also helping to protect the state. In addition, savers reaching the age of 55 would not be left to wallow in indecision when pondering the complexities of decumulation.
Claire Trott, Head of Pensions Strategy, Technical Connection, did not like the proposals.
She said: “More help for those accessing their benefits is what is needed, not defaults that could actually be at the detriment to some. I think it has been seen that Pension Wise hasn’t really worked and guidance without advice is difficult to provide, so revisiting Advice Vouchers would surely provide more benefits to more people than defaults that are really just arbitrary suggestions.”
She said: “Forcing people to access income at a certain age when they don’t necessarily need it will mean that it will likely be spent and then it won’t be there when they do actually need it.
“I don’t disagree that some are paralysed by all the options available to them, both with income and investment choices, but there isn’t a one size fits all retirement experience and we should remember that.”
Andrew Pennie, Head of Pathways, Intelligent Pensions agreed with her latter point, saying that to “deliver this as a ‘one size fits all’ solution will lead to mistakes and some poor client outcomes”.
He said: “Not all clients are suited to drawdown, either because they don’t want to or they aren’t in a position to take on the risks involved. Sustainable withdrawal rates have been discussed in the media a lot recently and taking income of between 4 and 6 percent as suggested will not suit everyone’s needs. Furthermore, in the current low interest economy, taking this level of withdrawal is likely to erode the pension fund too quickly. It is therefore vital to review withdrawal rates on both a personalised and frequent basis if we are to really tackle the risks of running out of money.”
He said the concept of auto-protection “does help to highlight one of the key risks in retirement – the risk of living too long” and it also makes sense for people throughout the decumulation process, particularly for those who are not receiving regulated financial advice.
Martin Tilley, director of technical services, Dentons Pension Management, said: “Auto-drawdown in itself is a potentially dangerous default. For some individuals, the need to annuitise at the point of taking benefits is the correct decision.
“A default into even a diversified asset portfolio exposes the individual to risk which may be inappropriate for them. I would argue that auto-drawdown is just as risky a concept as auto-annuitisation at age 55. The paper published today simply proposes changing an individual’s default option such that an individual will still need to seek guidance or advice.
CPS Research Fellow Michael Johnson, the author of the auto-protection report, said: "Any debate about what is the ‘right’ form of defaults at 55 and 80 should not be allowed to overshadow a more fundamental issue: the pots of most people at retirement are likely to be too small.
“We have to recognise that unless working life savings contributions are substantially increased (i.e. doubled), then many people are likely to run out of money before dying irrespective of the design of any retirement default."