Granting UK retirees freedom to spend their savings as they wish could undermine the success of auto-enrolment, according to NEST.
The two government policies – automatic enrolment into workplace pension funds, and ‘freedom and choice’ at retirement – are based on “diametrically opposed” assumptions, the defined contribution master trust warned.
The UK parliament’s Work and Pensions Select Committee – a cross-party group of MPs from parliament’s lower house – is conducting an inquiry into the rise of scams affecting pension savers. This has been linked to the ‘freedom and choice’ concept, introduced by former chancellor George Osborne in 2015, which removed the requirement for retirees to buy an annuity.
In its response to the committee’s call for evidence, NEST said it was “unrealistic” to move from an accumulation phase built around the idea that consumers were disengaged with pensions to a decumulation phase that placed all the “execution risk” on individual savers.
The two “diametrically opposed” policies could undermine each other, NEST argued, if savers failed to use their pension pots to build a “more adequate retirement income”.
“Should this state of affairs continue, we are extremely concerned that a large proportion of the NEST membership and wider savings populations will continue being subject to [the] risk of poor outcomes,” the scheme said – including falling victim to fraudsters.
NEST added in its response that “there needs to be significant innovation in both the advice and guidance market as well as from a propositional perspective… We do not see any current evidence that this is happening”.
NEST was set up in 2010 as a defined contribution provider to enable to introduction of auto-enrolment.
What do members think happens at retirement?
NEST surveyed a number of its members to find out their expectations for what would happen with the pot of savings they have built up with the scheme.
A third of NEST members (34%) said they expected the pension fund to pay a regular income in retirement – which it is not set up to do.
The majority (60%) said they did not know what would happen to their pension savings at retirement, either because they hadn’t thought about it, didn’t understand the options, or hadn’t yet decided.
Only 6% of members said they would use their retirement savings to “buy something from elsewhere”.
The UK regulator, the Financial Conduct Authority, also responded to the committee’s inquiry, warning that consumers “may miss out on investment growth and pay more tax than is necessary” because of a general mistrust of pension providers.
The regulator also said it was working on a “bespoke and targeted” campaign to raise awareness of scammers, in conjunction with the Pensions Regulator.
David Knox, author of the Melbourne Mercer Pensions Index, argued in his latest report – released last week – that the UK’s pension system would be improved by “restoring the requirement to take part of retirement savings as an income stream”.
In the Netherlands, discussions about allowing individuals more choice at retirement have led some commentators to warn that people could be worse off if they make the wrong choice.