Increasing reliance on defined contribution savings means the needs of future pensioners will be markedly different from those of previous generations, placing greater emphasis on the need for support, according to a new report.
The report from the Pensions Policy Institute, published on September 8, explained that increasing reliance on DC pots as opposed to older defined benefit schemes results in “more complex” retirement finances that future pensioners will have to manage, and that these will require more active engagement and will carry more risks.
DB schemes having fallen out of favour for a variety of economic and policy reasons, with many more future pensioners relying on defined contribution savings pots, the report said.
Alongside this, more people will be working for longer, with an increasing reliance on part-time and flexible working arrangements to smooth the transition to retirement.
Though acknowledging that people’s precise needs in retirement will vary wildly, the PPI report identified as general truths that future pensioners will be more reliant on DC savings, meaning they will need to take more decisions and incur more risk; while fewer people will reach retirement with sufficient savings to maintain their working-life standard of living.
The report identified six archetypes of retirement needs and desires “which can be used to help determine the best retirement income strategies”.
The six archetypes are: providing a secure income throughout retirement, funding retirement prior to the state pension age, providing financial support to relatives, meeting one-off costs (such as home improvements and holidays), saving for bequests, funeral expenses and such; and having a savings account “to use for occasional income to supplement other sources”.
Recognising that “people have varying ideas about what an optimal retirement income looks like,” the report nonetheless said that most archetypes would “benefit from a combination of access to flexible withdrawals and guaranteed income”.
PPI senior policy researcher Dr Mark Baker said: “As people’s working lives have changed, so have their lives in retirement. People will want to access their pension pots in different ways to meet varying needs and wants, using drawdown, annuity purchases or a combination of both.
“This represents a challenge for guaranteed income providers, as new approaches will have to be sought to meet the demands of a developing and flexible market.”
Annuities becoming more important
Changes in work and retirement behaviours are likely to see annuities grow in importance, the report explained; though the precise ways in which this occurs depend on the profile of the individual retiree, and which of the archetypes applies to them.
The PPI used scenario modelling based on three member profiles, and looked at how those who need or desire a guaranteed income in retirement might approach retirement income strategies, as well as how the annuities market is reacting to these emerging needs.
