Interview with Kate Smith, Regulatory Strategy Manager, Aegon UK.
What are the main characteristics of the retirement market in the UK?
The UK has an aging population coupled with a lack of saving that is actually getting worse, not better. People understand they are going to have to fund their own retirement but many are not doing anything about it.
The UK is at the beginning of a big experiment that will see the automatic enrollment of every eligible employee in the country into a pension scheme – this will largely be defined contribution schemes. The aim is to address this chronic lack of saving and undersaving. Defined benefit pensions are in decline. An increasing number of people are likely to have different bits of pension, defined benefit or defined contribution, from different employers. So we will see a trend of savers bringing their bits of pensions together into one place so they can do something meaningful with it when they come to retirement.
In the past most UK defined contribution savers have tended to buy an annuity when they come to retire, but we are now seeing a trend away from annuities towards income drawdown where an individual's pension fund is managed through retirement.
What are the key challenges facing the retirement market in the UK?
The fundamental challenge is that most people are simply not saving enough for their retirement. There is also a lack of advice among low and middle earners. The government has brought in more flexibility in how people take their retirement income, for example in relation to how income drawdown works. But more choice means more decisions need to be made, which in turn means there is a greater need for advice.
There is also a lack of planning by individuals as to when they are going to retire and how they are going to live on a reduced income. For many people, retirement is just something that happens to them. They need to be encouraged to take control, and this may mean getting advice.
The cost of guarantees is also a big issue. People like the idea of a guaranteed income but they do not like annuities because they appear expensive, and as we all know, increases in longevity and low interest rates have made them more and more costly. This is set to get worse for a number of reasons, including the Test-Achats case at the European Court, which has outlawed gender underwriting, and the more stringent capital requirements placed on insurers by the European Union's Solvency II initiative.
In your opinion, what are the solutions to these challenges?
Automatic enrollment into pensions for UK workers is potentially a launch pad for a savings revolution. Hopefully it will get millions of today's non-savers into the savings habit. This won't happen overnight, but we hope automatic enrollment will foster a new savings culture in the UK. And the savings industry needs to do its bit by making sure individuals are given the latest technology and tools to make providing for their financial future as easy as possible. The role of employers is absolutely vital in making automatic enrolment a success. Saving through the workplace is much easier than doing it yourself.
How can Aegon best help with these solutions in the UK?
The pensions industry has typically separated the accumulation of assets during an individual's working life and the payment of income in retirement. This outdated approach reinforces the idea of a retirement cliff-edge, where people stop working on a single day and go into retirement the next day.
Our recently launched Aegon Retirement Choices platform offers a seamless transition from building up a pension fund to drawing an income from it, using a range of tax-efficient wrappers. Aegon Retirement Choices facilitates the phased winding down of working life that will be more common in future, allowing individuals maximum flexibility over the way their money is managed and how it is drawn.
