Chad Brown, Chief Operating Officer, LeafHouse Financial.

Drawdown risks

The importance of educating the public on how they can make the savviest decisions with their pensions was a key discussion for the market – and one that required improvement – said Chad Brown, Chief Operating Officer at Texas-based LeafHouse Financial. 

In a recent Clear Path Analysis report, “Solutions not Products - Mitigating Risks in the Drawdown Phase of Retirement”, co-produced with LGIM America (LGIMA), Brown was one of several industry experts who spoke on the issues surrounding the US’s changing retirement market. The participants pushed the idea that more needed to be done by companies to reach and educate the public.

"Something that has started to surface is that members are being pulled in multiple directions because some are realising that they didn’t have enough saved for emergencies.”

Alongside this sentiment, they also touch on the industry’s reaction to the challenges and opportunities that stemmed from the changes to defined contribution (DC) pensions, which many said were key but poorly communicated to the consumer. 

“Looking at the choices that members have when they enrol in a plan, coming out of the pandemic, something that has started to surface – whether you call it wellness or preparation – is the fact that members are now being pulled in multiple directions because some of them are realising that they didn’t have enough saved for emergencies,” said Brown, noting that the market needs to do more to help consumers – especially when it comes to shortcomings around modernisation and digitisation. 

A study by the UK Financial Conduct Authority (FCA), said there the industry needed to provide better communications, support, and guidance for consumers with changes to retirement plans. “There are weak competitive pressures and low levels of switching – most consumers choose the 'path of least resistance', accepting drawdown from their current pension provider without shopping around,” the FCA said, discussing pitfalls and where they were most obvious. 

“[The consumers] are having to deal with medical expenses and haven’t saved enough for retirement to even generate income,” Brown said, citing a key difference between those dealing with retail versus institutional funds – the former of which was not seeing enough investment in adequately sharing ideas.  

Encouraging drawdown income 

Another key issue was the difference between advising for retirees to create a ‘one time’ nest egg with their pension, instead of having it being provided as an income stream over time. 

“Providers are coming at the policyholders from multiple directions telling them that they have to save in different ways, forms, and fashions and yet a lot of the materials and information available to members hasn’t changed beyond telling them that they need to save their proverbial 6% for retirement.” 

Brown said that it feels as though a lot of members are faced with confusing options on where and how much to save, how to save, and where they should be driving the majority of their savings as they prepare for whatever they are faced with now – which is often the responsibility of pension providers that do not give enough information. 

One Deloitte study said that “there is a role for product structures that combine flexibility and guaranteed income, although these are unlikely to develop for the mass market until the interest rate environment changes materially.” 

“Coverage continues to be a major issue and business owners aren’t seeing the benefit in offering retirement programmes for their employees.”

This issue of information and responsibility is also the case for small businesses. “From this perspective this continues to be an issue as the vast majority of large organisations – upwards of 90% - offer some retirement savings and benefits for their employees but the number in the small business front has continued to decline,” Brown said. 

He added that if you look at businesses with ten employees or less – the vast majority of small businesses in the US – less than 25% of them are offering some retirement benefit and this is down from a few years ago when it was nearer to 30%.  

“Coverage continues therefore to be a major issue as well and not only are they distracted but business owners aren’t seeing the benefit in offering retirement programmes for their employees,” he said. 

You can read this in full and see the rest of the report, by clicking here. 

 

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