1 May 2019
The ABI recently reported that 1.6 million pension pots worth nearly £20 billion could go unclaimed.
It cited more frequent job changes and house moves as the main reasons why people fail to claim all their pensions. Insurance providers and pension scheme trustees make considerable efforts to reunite people with lost or forgotten pensions. They also regularly remind members about the Government’s tracing agency, but the problem seems to be getting worse.
The eagerly awaited Pension Dashboard will undoubtedly help in the future. Right now, however, more of our clients are asking us for solutions to address the noticeable increase in both active and deferred pension scheme members who are well beyond retirement age and who have yet to claim their Defined Contribution (DC) savings.
Our starting point must be to better understand the reasons for this growing retirement inertia amongst members.
Too much choice?
We think choice is good for us, it represents an expression of our freedom, personal responsibility and self-determination. But too many options can create anxiety, particularly where choices are complex and the implications of any decision are not easily understood.
With the advent of Freedom and Choice, there has been a shift of responsibilities from Government and employers to pension scheme members. Making the right choice between all the new retirement options and products is now each member’s responsibility. But how many DC savers really feel comfortable choosing between the bewildering range of products and providers that are available? There is increasing evidence that many members are deferring making any choice.
Feedback suggests that a key factor is loss aversion – a concept which proposes that the pain of losing is psychologically about twice as powerful as the pleasure of gaining. It is often linked to a preference for the status quo and can help explain why DC savers would rather do nothing than risk doing the wrong thing and losing out.
The wrong age?
Choosing the right retirement age is difficult and early retirement for many DC savers is unaffordable. As State Pension age increases, so too do members’ plans and expectations of when they can retire. But our experience is that members don’t always let schemes and employers know when they plan to take their benefits, i.e. their Target Retirement Age.
For most DC savers, and particularly those invested in their pension scheme’s default investment strategy, their Target Retirement Age is key. It determines where their savings are invested, how income projections are calculated in their annual statements and when they will begin to receive retirement communications and support. But how many members know their Target Retirement Age or understand its importance? In our experience, most members don’t update it. Their “choice” remains set at the scheme default, irrespective of their plans.
Members now automatically join their employer’s pension scheme without having to select a contribution rate, investment option or Target Retirement Age. Of these three enrolment defaults, Target Retirement Age is often considered the least important in member communications. It is often linked to choosing an investment strategy, another area where members are notoriously uncomfortable making their own choices. For older members, perhaps it’s time to place more emphasis in member communications on the links between Target Retirement Age, affordability and likely income in retirement?
We must also recognise the need for more and earlier member education with retirement journeys that provide better support.
Anxious DC savers who want to become confident DC spenders need to start thinking about their options at least ten years before they plan to do anything – and they need more help. Pension Wise is a great place to start but members need guidance relevant to their specific scheme benefits. Without it, in ten years’ time, we could be looking at £40 billion in unclaimed pensions.
LCP DC Quarterly Update
What's on the horizon for defined contribution pensions? In this edition of our DC update we look at key market updates from the past quarter, as well as news on legislative changes that may require you to take action.Read the update