Supporting members into and beyond retirement

Why we need innovation in decumulation

By

Anish Rav

5/1/2023

I had the privilege of speaking about the broad topic of income in retirement at the World Pension Summit in The Hague in November last year.

From talking to delegates from around the world at the event about the prevalence of Defined Contribution (DC) retirement solutions, it became clear that there is a global problem that needs addressing.

How can we support members in the lead up to, and beyond, taking retirement benefits?

When it comes to who pays for living in retirement, the move over the last few decades from Defined Benefit (DB) schemes towards DC alternatives means a ‘risk transfer’ of income adequacy, from employers to individuals. To date, the innovations our industry has seen in investment, design, planning and communications have in the main had a primary focus on what we in the industry all refer to as ‘accumulation’ – increasing the amount that individuals save for retirement while they are still working.

Of course, consistently increasing how much people save is a good thing and critical to improving their financial wellbeing in retirement. However, what do other aspects of the shift to DC mean for members?

When people retire and begin the ‘decumulation’ of their pension savings, they are often left to their own devices, with relatively little support (especially compared to the amount of support available during accumulation). Yet this is arguably the most critical stage of the retirement savings journey.

It is a stage where, without support, they can experience a paralysis of decision-making, from a fear of making a bad financial decision with long-term negative effects. It’s no wonder that this can lead to members not making any decisions at all and/or, sticking to ‘default’ retirement options which may not be suitable for their circumstances and may damage their financial wellbeing in later life.

Good work undone?

Helping members build their later life savings is one step of the journey – but not the only step.

Imagine a driver on the start line of a critical race. Their team has worked tirelessly over a long period to bring the driver to this point – the car is ready, the engine's been prepped, race qualifying and practice have been completed and now it’s all up to the guy sitting behind the steering wheel. Imagine if, at this point, the team members decide that their job is done and they're all clocking off to watch the race on TV. What happens when the driver needs more fuel, the car’s tyres changing, or to know what is happening elsewhere on the track? Any support system has been completely removed, leaving the driver isolated, exposed and without backup, guidance or help.

This scenario isn’t dissimilar to the situation many pension scheme members find themselves in when they come to take benefits from pension schemes. All the support that has been available to them up to this point is suddenly stripped away at a time when it is needed most, with the potential to critically impact their wellbeing in the years that follow.

Time to re-think

If there is one thing I picked up at the World Pension Summit it is that in the context of DC schemes, the decumulation part of the retirement journey is not delivering across the globe. All too often, it is letting savers down. There is a real opportunity – and responsibility – for the industry to establish innovative decumulation solutions that will ultimately benefit pension scheme members around the world.

At Smart, many thousands of hours of research with members and savers across the world, along with the testing and optimisation of both its model and its features have led to the development of Smart Retire, offering genuine technology led solutions for the ever-growing cohort of DC savers reaching retirement. It has been heartening for me to see this focus on what has so far been the biggest unsolved problem in retirement: the wave of decumulation beginning to sweep the world, following the switch to DC, and the support structures that are required to make sure we don’t let down the millions of people we’ve supported up to that point.

The industry needs a new approach and fresh thinking like this. I’m excited to be leading the charge in this area, and proud to be working for a business that is at the forefront of challenging convention and creating innovative solutions for the benefit of everyone.

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FOOTNOTES
CONTRIBUTORS

Supporting members into and beyond retirement

Why we need innovation in decumulation

I had the privilege of speaking about the broad topic of income in retirement at the World Pension Summit in The Hague in November last year.

From talking to delegates from around the world at the event about the prevalence of Defined Contribution (DC) retirement solutions, it became clear that there is a global problem that needs addressing.

How can we support members in the lead up to, and beyond, taking retirement benefits?

When it comes to who pays for living in retirement, the move over the last few decades from Defined Benefit (DB) schemes towards DC alternatives means a ‘risk transfer’ of income adequacy, from employers to individuals. To date, the innovations our industry has seen in investment, design, planning and communications have in the main had a primary focus on what we in the industry all refer to as ‘accumulation’ – increasing the amount that individuals save for retirement while they are still working.

Of course, consistently increasing how much people save is a good thing and critical to improving their financial wellbeing in retirement. However, what do other aspects of the shift to DC mean for members?

When people retire and begin the ‘decumulation’ of their pension savings, they are often left to their own devices, with relatively little support (especially compared to the amount of support available during accumulation). Yet this is arguably the most critical stage of the retirement savings journey.

It is a stage where, without support, they can experience a paralysis of decision-making, from a fear of making a bad financial decision with long-term negative effects. It’s no wonder that this can lead to members not making any decisions at all and/or, sticking to ‘default’ retirement options which may not be suitable for their circumstances and may damage their financial wellbeing in later life.

Good work undone?

Helping members build their later life savings is one step of the journey – but not the only step.

Imagine a driver on the start line of a critical race. Their team has worked tirelessly over a long period to bring the driver to this point – the car is ready, the engine's been prepped, race qualifying and practice have been completed and now it’s all up to the guy sitting behind the steering wheel. Imagine if, at this point, the team members decide that their job is done and they're all clocking off to watch the race on TV. What happens when the driver needs more fuel, the car’s tyres changing, or to know what is happening elsewhere on the track? Any support system has been completely removed, leaving the driver isolated, exposed and without backup, guidance or help.

This scenario isn’t dissimilar to the situation many pension scheme members find themselves in when they come to take benefits from pension schemes. All the support that has been available to them up to this point is suddenly stripped away at a time when it is needed most, with the potential to critically impact their wellbeing in the years that follow.

Time to re-think

If there is one thing I picked up at the World Pension Summit it is that in the context of DC schemes, the decumulation part of the retirement journey is not delivering across the globe. All too often, it is letting savers down. There is a real opportunity – and responsibility – for the industry to establish innovative decumulation solutions that will ultimately benefit pension scheme members around the world.

At Smart, many thousands of hours of research with members and savers across the world, along with the testing and optimisation of both its model and its features have led to the development of Smart Retire, offering genuine technology led solutions for the ever-growing cohort of DC savers reaching retirement. It has been heartening for me to see this focus on what has so far been the biggest unsolved problem in retirement: the wave of decumulation beginning to sweep the world, following the switch to DC, and the support structures that are required to make sure we don’t let down the millions of people we’ve supported up to that point.

The industry needs a new approach and fresh thinking like this. I’m excited to be leading the charge in this area, and proud to be working for a business that is at the forefront of challenging convention and creating innovative solutions for the benefit of everyone.

About Smart

Smart is a global savings and investments technology platform provider. Its mission is to transform retirement, savings and financial wellbeing around the world.

Smart partners with governments and financial institutions (including insurers, asset managers, banks, financial advisers) to deliver retirement savings and income solutions that are digital, bespoke and cost efficient. In addition to the UK, Smart is operating in the USA, Europe, Australia and the Middle East with more than a million savers entrusting over £4 billion in assets on the platform. 

Smart supports its clients with a 750 strong global team.

Legal & General, Fidelity International Strategic Ventures, J.P. Morgan, the Link Group, Barclays, Natixis Investment Managers, DWS Group and Chrysalis Investments are all investors in Smart.

We tweet as @SmartPensionUK.

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