As a profession we have a strong focus on continual improvement: improving the financial circumstances of clients, and improving standards around pensions.
This in itself is hugely positive. However, talking about what can be improved requires focusing on things that are not working as well as they could be.
This can sometimes make it seem like things are universally awful the way they are. If we start off with an unfairly negative view of the current situation, we risk proposing disproportionate solutions for improvements.
For example, look at the attention currently given to consumers’ spending habits in retirement. Most of the research and reports looking at the pension freedoms are focused on the fear that consumers will run out of money in retirement. This will happen either by exhausting their pensions in one go or by overspending in drawdown, due to underestimating factors such as investment risk and longevity.
There is also a growing minority at the other end of the spectrum. They are focusing on groups of consumers who are likely to overestimate longevity and underspend, living unnecessarily frugally and missing out on enjoying their retirements.
Reading such reports, it is easy to get the impression the vast majority of consumers fall into one of these two camps, with very little grey area in between. Rather bizarrely, both scenarios also seem to assume the consumers in either situation will not change their habits.
Surely most people who realised their pension fund was declining more rapidly than anticipated would change their withdrawals (on the assumption that most would have at least some capacity for varying their spending). Conversely, is it not possible people who realised they were in a more comfortable position than they thought would decide to treat themselves?
In any case, a recent briefing note from the Institute for Fiscal Studies, ‘The Use of Wealth in Retirement’, seems to suggest the overall picture is more balanced. Admittedly, the data is taken from before the pension freedoms took effect, but it is still useful to get an idea of people’s behaviour coming into the new legislative environment.
Generally speaking, the paper found the majority of people do not spend all of their wealth in retirement. The average decline in net wealth between age 70 and 90 was 31%.
The paper acknowledged it could not comment on whether people were striking the right balance between ‘retirement spending, precautionary saving and the bequests they leave on death’, all of which were assumed to be valued by people to some extent. But it still does not paint too bad a picture overall. It certainly does not suggest most people are set to either exhaust all their wealth and run into serious financial difficulty, or spend their whole retirement keeping their purse strings needlessly taut.
The paper also showed wealthier retirees were spending more than the less wealthy retirees. It seems pension freedoms retirees, at least so far, are broadly following this pattern: the regulator’s Retirement Outcomes Review research showed most people exhausting pensions had other sources of wealth elsewhere and could therefore probably afford to do so.
It would also imply that, instead of taking a ‘might as well spend it’ view, those with lower wealth in retirement are more likely to be cautious with the money they have. There was also evidence people who expected to need care later in life were spending less and making provisions for the cost.
I am not arguing reports like these should be taken as evidence the pensions industry and retirement landscape have no problems, nor that we do not need to work on improvements. We know there is a need to drive higher levels of engagement and trust, improve the information and support available, and ultimately help to improve outcomes for consumers.
However, if we approach these matters as though all consumers are currently hurtling towards disaster when this is not the case, the solutions we propose are unlikely to work. We will be far more successful if we start with a more balanced, accurate view of how things currently stand.
Jessica List is pensions technical manager at Curtis Banks Group.