Jessica Mosher
OECD Pensions Outlook 2024
Improving Asset-backed Pensions for Better Retirement Outcomes and More Resilient Pension Systems
Abstract
This chapter provides policy makers with guidance on how to design the framework for the payout phase for defined contribution pension plans in a way that considers the heterogenous needs of individuals in retirement. A well-designed framework for the payout of retirement savings in defined contribution plans should consider the role of those savings plans within the broader pension system, as well as how individual and economic circumstances may influence the optimal solution for payout. It should also support individuals in accessing the most appropriate options for their situation at retirement.
Policy makers need to ensure that the framework for the payout of retirement savings for defined contribution plans considers whether the options available to individuals at retirement are suitable for their financial needs. The most appropriate solutions for payout will depend in part on the purpose for which retirement savings will be used, as the financial risks to mitigate will differ depending on this purpose. Mitigating financial risks in retirement is different than doing so during the accumulation of retirement savings, and there is no one-size-fits-all solution that applies to all contexts and individual profiles. The financial risks to mitigate in retirement largely depend on the role of the defined contribution plan within the pension system, as well as individual circumstances and economic context. Payout design needs to consider the heterogeneity of needs in retirement and allow for adequate flexibility to adapt to different situations.
The regulatory framework also needs to consider how to facilitate the matching of financial options at retirement with the individuals who would most benefit from those options. Even when suitable financial options for retirement may be available, individuals may not access them due to a lack of awareness, understanding, or guidance.
This chapter aims to provide policy makers with guidance on how to design the framework for the payout phase for defined contribution pension plans in a way that considers the heterogenous needs of people in retirement. The first section of this chapter presents a framework for assessing financial needs in retirement and describes some of the benchmarks used to do so. The second section looks at how financial solutions can meet these different needs in retirement. The third section discusses approaches to deliver appropriate financial solutions to individuals, along with the benefits and challenges of each. The final section provides policy guidance on designing the framework for the payout phase to account for heterogeneous financial needs in retirement.
Financial needs in retirement are made up of essential spending, unexpected spending and discretionary spending. The first priority is to have income to cover basic needs and essential spending. Individuals ideally will also have a source of financing to provide security to cover moderate financial shocks and unexpected expenses. Those having remaining resources can use their savings on discretionary spending to enjoy a more comfortable lifestyle (Figure 5.1).
The design of the framework for the payout phase for defined contribution pensions should account for these different needs, as the financial solutions that help meet the different layers are not necessarily the same. Financing for basic needs should be regular and sure. Savings set aside for security will require a certain level of safety and liquidity. Lifestyle needs are likely to require more flexibility and may change over time.
Policy makers need to first assess how much money is required to meet these different needs in retirement in order to understand the expected role of defined contribution plans in financing retirement. Determining the amount of savings needed to finance retirement has to account for how the needs of retirees differ from the rest of the population, as the spending of retirees does not necessarily mirror that of working age individuals. Numerous studies document a decrease in spending following retirement. This is largely attributed to a decline in food and work-related expenses (Olafsson and Pagel, 2018[1]; Agarwal, Pan and Qian, 2015[2]; Velarde and Herrmann, 2014[3]; Luengo‐Prado and Sevilla, 2012[4]; Lührmann, 2007[5]; Miniaci, Monfardini and Weber, 2003[6]).
Consumption benchmarks are a useful tool to indicate how much retirement savings people need to finance different lifestyles in retirement. Such benchmarks can help policymakers to determine how much money individuals will need in retirement to cover basic needs, and therefore allow them to calibrate expectations about how retirement savings can best be deployed to meet individuals’ financial needs in retirement. They can also allow individuals to have an idea of the lifestyle they will be able to achieve in retirement given the savings they have, or alternatively to adjust their level of savings to achieve their desired lifestyle. Several jurisdictions have developed such benchmarks for their population. For example, the Mexican pensions regulator, CONSAR, calculates the required expenditure to achieve a minimum, moderate, and comfortable lifestyle in retirement. The calculations are based on the National Survey of Household Income and Expenditure (ENIGH) database and provides a breakdown by spending categories.
Benchmarks developed by other jurisdictions recognise that the amount of money needed to cover financial needs in retirement can vary across different types of people, such as whether retirees are single or in a relationship. The Pensions and Lifetime Savings Association (PLSA) in the United Kingdom has defined three categories of living standards in retirement, with different amounts calculated for singles and couples (Table 5.1). The minimum living standard essentially provides only a basic level of income, with very little flexibility for covering other expenses. The moderate living standard allows for some additional security needed to cover irregular expenses. The comfortable living standard involves additional income to cover discretionary expenses to finance a more comfortable lifestyle. The living standards also break down the budget of each living standard category by type of expense (e.g. housing, food, transportation) (PLSA, 2024[7]). The Association of Superannuation Funds of Australia (ASFA) has developed similar retirement standards for Australians, and provides more detailed breakdowns of expenditure by spending categories (ASFA, 2023[8]). In the Netherlands, the National Institute for Family Finance Information (NIBUD) produces reference budgets for singles and couples over the age of 65 (Nibud, 2009[9]).
Source: Based on PLSA (2024[7]), Retirement Living Standards, https://www.retirementlivingstandards.org.uk/
Financial needs in retirement are likely to vary based on additional factors which benchmarks may need to account for, such as region, housing, and health. The Fin-Ed Centre at Massey University in New Zealand calculates two levels of expenditure based on the actual expenditure levels of retired New Zealanders that vary by household size and whether the retiree lives in a metropolitan or provincial area. The first level is a ‘no frills’ lifestyle covering basic needs and based on the average spending of the second income quintile. The ‘choices’ lifestyle allows for more comfort and is based on the expenditure of the fourth income quintile (Matthews, 2023[10]). Another example is the Elder Index developed by the Gerontology Institute at the University of Massachusetts Boston in the United States, which provides an interactive web tool that visually shows the breakdown of necessary monthly expenses by spending category. Calculations vary depending on the county, household size, housing status, and health status (poor, good, excellent) (Elder Index, 2023[11]). The Canadian Elder Standard, developed as an academic exercise, calculated basic income needs that vary by housing (renter, homeowner with or without a mortgage), means of transportation (public transportation or owned car), gender, household size, age (65-74 or 75+), long-term-care needs, and city (MacDonald, Andrews and Brown, 2010[12]).
Consumption benchmarks such as those described above, combined with the expected retirement incomes from other sources, can provide an indication as to what extent retirement savings in defined contribution plans will be used to finance the different types of financial needs in retirement. This can then inform the payout options that should be available for individuals for them to best be able to meet their needs.
This section discusses how different payout options at retirement can allow retirees to finance the three different types of spending needs in retirement. It considers consumption needs in light of evidence of what retirees need and want, and discusses the desirable features of options to meet those needs and the circumstances under which alternative options may be more appropriate.
5.2.1. Payout options to meet essential spending needs in retirement
Individuals should ideally have guaranteed lifetime income to be able to cover essential spending needs throughout retirement. Essential spending needs include housing, food, transportation, and healthcare costs. Guaranteed lifetime income products that provide a constant stream of income for life are well suited to cover these needs and are in line with retirees’ preferences for a certain level of secure income. Nevertheless, such products may not be appropriate in all situations, and the most suitable option will also depend on context and individual circumstances.
Guaranteed lifetime incomes can come in many forms. The basic product is an immediate lifetime annuity paying a regular guaranteed income for life. Deferred annuities allow for payments to begin at a later date. Payments can also increase or decrease over time, either by a specified amount or indexed to an external variable such as inflation.
Beyond being well-suited to finance essential spending, having a guaranteed income in retirement is also in line with the preferences of individuals. Indeed, the security and safety of retirement income is often a priority for individuals planning for their retirement. A recent survey across 15 European countries showed that security was the most important priority when investing for retirement. Around 80% of respondents chose safety over performance, with women having a larger preference for security compared to men. Additionally, 62% of respondents stated that they preferred an annuity solution in retirement for at least part of their savings, though the majority of individuals still preferred a lump sum over an annuity when shown projections (Insurance Europe, 2023[13]). A survey in the United Kingdom showed that 92% of respondents felt that a guaranteed regular income in retirement was important (Standard Life, 2023[14]). In the United States, having investment options that provide a guaranteed lifetime income was the top improvement identified for workplace retirement plans (EBRI, 2023[15]).
The guaranteed lifetime income that pay-as-you-go public pension benefits provide in many jurisdictions can be sufficient to cover basic income needs. Where this is not the case, guaranteed life annuities can offer the security and certainty of a stable lifetime income to complement the retirement income supplied by the public system.
The extent to which pay-as-you-go (PAYG) public pension benefits are sufficient to cover basic income needs varies across population groups. The self-employed, for example, usually receive lower public pensions than regular employees. Figure 5.2 shows that the median public pension benefit for the self-employed is 78% of that received by regular employees on average across the 15 OECD member countries shown in Figure 4.3, and in Germany they receive only around half of what a regular employee gets.
Source: OECD (2019[16]), Pensions at a Glance 2019, https://doi.org/10.1787/07663d56-en
PAYG public pension benefits often have progressive formulas that provide higher relative income replacement rates for low earners. PAYG public pension benefits are therefore more likely to cover low-earners’ basic needs compared to high earners.
The time at which individuals claim public pension benefits can also significantly influence the extent to which they are sufficient to cover basic income needs. In some jurisdictions, individuals can increase their benefits by claiming at a later age. The government of Quebec, Canada recently made changes to the rules of the PAYG public pension that facilitate and encourage people to delay the initial claiming of benefits, which could increase the public pension they receive by up to 36% (Laverdière, Hallé-Rochon and Godbout, 2023[17]). In the United States, individuals can increase their public pension benefits by 75% by delaying claiming from age 62 to age 70 (Maurer and Mitchell, 2017[18]). An additional benefit of maximising the amount of public pension benefits is that they generally provide protection against inflation. As such, delayed claiming can be a cost-effective way for individuals to benefit from both longevity and inflation protection for basic income needs, both of which can be more expensive to obtain from a private provider because of the risk exposures involved. In these cases, using retirement savings to finance the first few years of retirement – e.g. via a fixed term annuity or programmed withdrawals – until the public pension is claimed may be a more efficient solution than using the savings to purchase an immediate life annuity.
Inflation protection from PAYG public pension benefits may also eliminate or reduce the need for additional inflation protection to cover basic income needs in retirement. Where additional protection is needed, one needs to consider the value for money offered by inflation-indexed annuities. In principle, a more cost-effective alternative to mitigate inflation risk would be a life annuity that increases by a fixed amount over time, which presents significantly lower risk exposures for providers.
Alternative financial solutions may be better suited for individuals retiring at a different age than the normal retirement age. Those who continue working part-time may not need additional income at the normal retirement age. Individuals retiring earlier than expected – which is often due to job loss, poor health, or caring responsibilities – may not have access to their PAYG public pension at the time they retire and will require an interim solution to meet their basic income needs, potentially via a fixed-term annuity or regular withdrawals from their retirement savings.
The amount of retirement savings that individuals have available also needs to be considered. If savings are not sufficient to purchase a meaningful level of lifetime income, individuals are likely better off taking a lump-sum or drawdown product.
Lifetime income products often lack flexibility and liquidity, making them less suitable for certain individuals. Individuals in very poor health may not benefit from the longevity protection the products offer and may require additional flexibility to cover medical expenses. Individuals entering retirement with high-cost debt may be better off using some of their retirement savings to reduce their debt levels, which would also reduce their basic income needs.
The economic context in which individuals retire may also call for flexibility. Individuals retiring in a low-interest rate environment will require more savings to purchase a given level of guaranteed income. Lifetime income products offering lower or no guarantees could allow them to have higher levels of expected income for a given amount of savings. Individuals retiring after a market crash may be better off waiting until the market recovers to use any savings to purchase a guaranteed lifetime income, rather than locking in their losses as soon as they retire.
Therefore, while guaranteed lifetime income products are normally best suited to meet essential spending needs in retirement, the extent to which retirement savings should finance the lifetime income will depend on the context. The payout options should consider the role of PAYG public pensions in providing a lifetime income, as well as individual or economic circumstances that may require more flexibility.
5.2.2. Payout options to meet unexpected spending needs in retirement
Retirees will ideally be able to keep some of their financial resources aside to use in case they experience an unexpected expense or emergency that cannot be financed using their regularly available resources. Common financial shocks that retirees face relate to healthcare, home repairs, or the loss of a spouse. Funds used for unexpected expenses need to be available and easy to access when individuals need them, and therefore need to be held in relatively safe and liquid assets. The need for retirees to set aside additional savings to cover unexpected expenses in retirement will depend in part on country context, the availability of affordable insurance products, and individual circumstances.
Health shocks are a common reason for people to put aside savings in retirement. In Australia and the Netherlands, for example, a study found that retirees saved primarily to have some precautionary savings for health reasons, and this was a more important motivation for women than for men. Precautionary savings is also higher for those with low liquidity, highlighting the importance of having financial resources that are easily accessible (Alonso-García et al., 2022[19]). The need to save for health shocks, however, also depends on public healthcare coverage. Retirees in Northern European countries tend to spend down their wealth more rapidly than in Central and Southern European countries and the United States. Northern Europe tends to also have higher public healthcare coverage, indicating less of a need for precautionary savings (Nakajima and Telyukova, 2013[20]).
Home repairs are another common financial shock in retirement. One survey of the United States population indicated that over 40% of retirees below age 80 have had an unexpected financial shock, and that nearly a quarter of these shocks were due to major home repairs (Greenwald Research, 2021[21]). A survey in Costa Rica indicated that 61% of those withdrawing a lump-sum from their retirement savings used it for home improvements (SUPEN, 2020[22]).
The loss of a spouse can also be detrimental to a retiree’s finances. In a survey of children in the United States with recently deceased parents, one-third felt that the death of one parent had reduced the financial security of the surviving parent, and a quarter reported that the financial situation became much worse (Greenwald Research, 2022[23]). Divorce can also be financially harmful, and can have an even larger negative impact on finances in retirement that the death of a spouse (Greenwald & Associates, 2016[24]). Having a safety-net may help individuals manage their transition following the loss of a spouse.
Nevertheless, a safety net will not be able to absorb all financial shocks, and larger shocks may require alternative means of financing. Where available and affordable, insurance products such as auto, home, and medical insurance can be an effective solution to mitigate larger shocks to the extent that the risk is insurable at an affordable price. Such insurance will be particularly valuable for low- to middle-income households who will have a lower capacity to absorb these types of shocks on their own, but who could potentially afford premiums with their retirement incomes.
However, insurance solutions may not always be available or affordable. Indeed, evidence indicates that long-term care costs and divorce are two of the sources of financial shocks that retirees are the least prepared for. Around 40% of lower-income people in the United States and Canadians report being financially unprepared for long-term care expenses, and 35% unprepared for divorce. These two risks are the most common sources of expenses that retirees are unable to support (Greenwald & Associates, 2016[24]). Most of those over the age of 85 have no realistic view on how they will pay for long-term care (Greenwald & Associates, Inc., 2018[25]). Similarly, among individuals retiring in the United Kingdom around 2022, 31% have no idea how to prepare for long-term care costs, and 27% have no plans to set money aside to do so (abrdn, 2022[26]). One study estimates that 25% of the elderly needing long-term care in Europe would not be able to finance 10% of their expenses even if using all of their financial resources (Bonnet, Juin and Laferrère, 2019[27]).
Homeowners will have an additional financial resource available to them that renters do not, which may also influence the amount of savings that a retiree needs to keep available for unexpected expenses, in particular for health shocks. While there seems to be an aversion to the use of home equity to finance shocks, when it is used retirees tend to use it as a source of financing of last resort in response to the loss of a partner or a large health expenditure. In Europe, changing homes in retirement is most common following a reduction in household members, such as following divorce or the death of a spouse (Angelini, Brugiavini and Weber, 2013[28]). Households in the United States tend to use housing equity as precautionary savings for health risks (Poterba, Venti and Wise, 2011[29]). After health insurance, home equity is the primary resource to finance a health shock (Moulton et al., 2021[30]). One US study showed a significant decline in wealth following the diagnosis of a serious diseases, primarily driven by a reduction in home equity following the sale of a home (Moulton et al., 2021[30]).
Therefore, while safety-nets will not be able to absorb all financial shocks, it is nevertheless important to allow for some flexibility for retirees to set some savings aside to cover moderate unexpected expenses.
5.2.3. Payout options to meet discretionary spending needs in retirement
Retirees should be able to use any additional resources after essential spending and security needs are met as discretionary spending to finance their desired lifestyle. Most retirees with sufficient savings are likely to have regular discretionary expenses to maintain a certain standard of living, as well as occasional discretionary expenses such as holidays or other large purchases. Lifetime income products can be valuable for regular discretionary expenses as they allow people to easily budget their expenditure and avoid underspending. Nevertheless, discretionary spending needs are likely to diverge more across population groups, and therefore the options available should allow for a certain level of flexibility to adapt to different contexts and situations.
People value flexibility about as much as they value security. In the same survey in the United Kingdom showing that over 90% of the population thought a guaranteed income was important, nearly 90% also thought that being able to have flexible access to money was important (Standard Life, 2023[14]). A survey of individuals in the United States revealed that 41% of retired individuals preferred investment solutions to finance their retirement compared to 20% preferring an annuity (GSAM Insights, 2022[31]).
There is also evidence indicating that that regular income is an important factor for financial wellbeing in retirement. Retirees financing more of their consumption through lifetime annuities seem to have higher levels of satisfaction and may remain more satisfied throughout retirement (Panis, 2003[32]). The satisfaction of those not having annuities declined over time. In the United Kingdom, annuitisation has been found to increase life satisfaction as well as consumption levels (Gao, Loewenstein and Wang, 2022[33]). A survey in the United States found that 90% of those who took an annuity reported that their budget was more predictable, that they felt more financially secure and that it was easier to pay for their needs (MetLife, 2022[34]).
Having a regular income also helps people to budget how much they spend in retirement. In the United States, one study showed that those having income from a defined benefit pension plan drew down initial wealth more slowly than those who did not have a defined benefit plan (Siliciano and Wettstein, 2021[35]). This implies that people likely budget their spending based on the annuitised income they receive and spend less of their remaining wealth on discretionary spending.
Indeed, individuals often refer to some reference withdrawal amount to budget their regular spending, even if this level of spending is not optimal. More than half of retirees over the age of 65 in Australia draw down their superannuation account at the minimum required rate (The Australian Treasury, 2020[36]). In the United States, a survey of individuals withdrawing from their accounts indicated that 90% considered that the Required Minimum Distribution rates were important in deciding how much to withdraw, and over half viewed these rates as a good guide for an appropriate drawdown rate (Brown, Poterba and Richardson, 2017[37]). Using such references to budget can lead retirees to not spend down their retirement savings and have a lower standard of living than what they should be able to afford.
Given this evidence, products providing some regular income, whether guaranteed or not, seem quite valuable for individuals to finance their regular discretionary spending and optimise their spending levels over time. Given the heterogeneity of discretionary spending needs, such products could present a wider range of features that allow the individual to increase their expected levels of income while still mitigating some of the risks they face to finance their retirement.
Variable lifetime income products with low or no guarantees could be an attractive solution to increase the amount of expected income that retirees can receive and allow them to have a reference income for budgeting purposes without worrying that they will ever run out of income.1 However, the income from these products can be subject to volatility making the income payments less predictable. Nevertheless, given that discretionary spending is not strictly necessary, this may be an acceptable trade-off for many retirees. More risk averse retirees may be better off with a product providing a lower level of lifetime income that is guaranteed.
Inflation protection is likely to be less important for products providing discretionary income compared to those meant to cover basic income. Individuals’ consumption levels in retirement tend to decline over time across all income levels. The decline in spending varies across spending categories and countries, however. Leisure spending on travel and holidays tend to increase early in retirement before eventually decreasing, particularly for higher-income households (Centro International sobre el Envejecimiento, 2021[38]; Rohwedder, Hurd and Hudomiet, 2022[39]; Crawford, Karjalainen and Sturrock, 2022[40]). One reason that consumption declines with age is that people simply enjoy spending less, implying that it is mainly discretionary spending that declines. One study in the United States found that reported enjoyment from spending predicts spending patterns in all categories, and that enjoyment tends to decrease with age along with spending patterns, even controlling for financial constraints (Rohwedder, Hurd and Hudomiet, 2022[39]). Given these observations, individuals will have less of a need to maintain purchasing power for discretionary spending throughout their retirement.
Drawdown solutions that leave assets invested to regularly withdraw as income can also provide regular cash flow to retirees, with potentially more flexibility than lifetime income products. Nevertheless, these products do not protect individuals against the longevity risk of running out of savings, which may lead them to spend more conservatively than they can afford to. Managed drawdown products where the provider decides the withdrawal amount may be better to optimise income levels in light of investment and longevity risk by dynamically adjusting the payments, though potentially with reduced flexibility. These types of products can also be combined with a deferred lifetime income product to target a more stable income profile and mitigate the risk of eventually running out of assets.2
Flexible drawdown products may be best suited for occasional discretionary spending. These allow individuals to decide when and how much they withdraw, so that they can use the money as they need it.
Ensuring that suitable options exist for retirees to utilise their savings in retirement does not ensure that they will do so. This is often due to a lack of awareness of options available, a lack of accessible information, or administrative barriers. The rules and regulations of the pension system should aim to overcome these obstacles to increase retirees’ take-up of suitable options to finance their retirement.
Even though a large proportion of individuals state a preference for a lifetime or guaranteed income, the proportion of individuals who voluntarily choose such a product is much lower, even when products are readily available. One randomly controlled trial in the United States indicated that over 50% of those having at least USD 100 000 in retirement savings would be willing to purchase a life annuity at prevailing rates, in contrast to only around 12% who actually do (Arapakis and Wettstein, 2023[41]). Similarly, in the United Kingdom, 92% of survey respondents felt that a guaranteed regular income in retirement was important, yet fewer than 10% of individuals accessing their retirement savings for the first time use their savings to purchase an annuity (Standard Life, 2023[14]; FCA, 2024[42]).3
One reason for the lack of take-up of lifetime income products is a lack of awareness that these products are available. In the United Kingdom, 32% of people aged 50-69 saving for retirement had not heard of a life annuity, and an additional 21% thought the product was a risky product with volatile income (HM Treasury, FCA, 2023[43]). In the United States, one third of savers were not familiar with lifetime income products (Arapakis and Wettstein, 2023[44]).
Other people have a hard time accessing or understanding information they need to make good decisions. Only 26% of pension savers in the United Kingdom feel that they understand their pension statement (HM Treasury, FCA, 2023[43]). In addition, savers also indicated that the information was not timely or helpful (FCA, 2023[45]). Even when people seek advice to help them make a decision, advisors often fail to discuss lifetime income options with their clients. In the United States, 10% of advisors do not recommend annuities to anyone, and two-thirds of advisors recommend them to fewer than half of their clients (Arapakis and Wettstein, 2023[44]).
Administrative barriers that complicate the process to choose an option for retirement can also impede individuals from choosing the most suitable financial solution. In the United Kingdom, for example, individuals are less likely to make the effort to shop around for a decumulation product compared to an investment product, and have a tendency to stay with their existing providers. Individuals also cited difficulties in contacting their provider for information (FCA, 2023[45]). In the United States, the failure to purchase an annuity may indicate a lack of knowledge of how to go about doing so (Arapakis and Wettstein, 2023[41]).
There are broadly three levels of assistance that can help to overcome the lack of awareness, information, and accessibility around options for the payout phase of defined contribution pensions to help ensure that retirees access suitable products to finance their retirement. The first is a default solution, where individuals will automatically have a payout solution chosen for them. The second is the provision of guidance to give individuals the information and tools needed to make an informed decision on their own and then execute it. The final is financial advice, where individuals can have a personalised recommendation for a suitable financial solution that considers their specific needs and objectives. Each of these options presents different advantages and challenges relating to implementation and ensuring successful outcomes.
5.3.1. Default options
Default options are those that individuals get if they do not actively choose or if they fail to take any action at all. The main benefit of a default option is its effectiveness; because of inertia and other behavioural biases such as choice overload that impede decision-making, the majority of individuals usually end up staying in the default option rather than actively choosing a course of action, even if an alternative may be better suited for their needs. This effectiveness is therefore also a key disadvantage of having a default option. Because it relies on inertia, it perpetuates individuals’ disengagement in financial planning for retirement by offering a path of least resistance that may or may not be suitable for their personal circumstances.
The choice to implement a default must be conscious of any potential harm that the option could have, because most people end up in the default. The potential for harm from a default solution for the payout of retirement savings is greater than that for defaults for the accumulation of retirement savings. This is firstly because while lifetime income solutions can be a suitable option for many individuals, they are often irreversible and individuals will not be able to change their mind or adapt in the future if this option is not the most appropriate for their circumstances. Secondly, the variables to consider in retirement are more heterogeneous and complex. Saving for retirement mainly involves deciding whether contributions are affordable and how to employ savings most effectively to maximise the level of savings accumulated at retirement.
The latter consideration can be solved with minimal harm by defaulting individuals into a low-cost investment product with a reasonable long-term investment risk profile such as a lifecycle strategy. While affordability can vary depending on individual circumstances, the solution to address this can be simple and easy to change (i.e. save less). However, financial decisions for payout need to account for uncertainty in future expenses (liquidity risk), short-term investment returns (sequencing risk), and lifespan (longevity risk), which cannot be addressed with a single, simple solution. For example, products providing longevity protection generally do not allow for liquidity, and guaranteed products can lock in any investment losses or low interest rate for life. Identifying an appropriate default solution for payout that is not likely to cause harm is therefore not a simple task, and relying solely on a default option for pension payout may not be ideal.
Nevertheless, default solutions may still be useful in situations where a retiree is likely to be better off with the default than following an alternative path of least resistance. Ideally, a default solution will allow individuals to adapt if they find that the resulting outcome is not appropriate for their needs in retirement. Any default option providing guarantees should consider prevailing financial market conditions to ensure that financial losses or unattractive pricing terms are not locked in for life. Additionally, to the extent possible, defaults should take into account variables that can provide an indication that a certain option is not likely to be suitable.
The irreversibility of lifetime income options makes them problematic as a default option in many cases. Even if many retirees would benefit from a lifetime income, the lack of flexibility could result in substantial harm for certain groups. Examples include those in very poor health who would not benefit from longevity protection and may need their assets available to cover medical expenses, those with high-cost debt who would be better off reducing their debt payments, or those with limited resources who would not be able to receive a meaningful level of income or who may need to retain some liquidity in case of unexpected expenses. Nevertheless, where the other components of the pension system do not provide sufficient longevity protection, lifetime income options as a default may be needed, ideally taking into account the circumstances when this is not likely to be suitable.
There are ways to structure a lifetime income option that allow for some flexibility, though these may not always be sufficient to prevent harm. Many products offer ‘cool down’ periods that allow individuals to change their mind within a limited timeframe. For example, the Secure Act 2.0 in the United States allows for a cooling-off period of up to 90 days for qualified life annuity products (QLACs). Some products allow individuals to surrender the product before the initial premium has been paid back, but this can be quite costly and can involve high penalties and the opportunity cost of any investment income that the retiree could otherwise have earned. Composite products incorporating a deferred element of lifetime income may be able to more easily allow flexibility. For example, Nest’s Guided Retirement Fund in the United Kingdom offers a managed drawdown solution that individuals are free to withdraw from before the age of 85, at which point they will be defaulted into a guaranteed lifetime annuity if they have not yet opted out.
Defaulting retirees into payout options offering guarantees could also cause harm when financial market conditions make it likely that the retiree would receive lower retirement incomes than they otherwise would have. Those retiring following a negative shock to the financial markets or in a bear market are likely to be better off waiting until markets recover to purchase a product with a guarantee to avoid fully locking in any investment losses their savings experienced. Those retiring in a low-interest rate environment would not be able to receive as high a guaranteed income as they may have planned for and may be better off in a product with low or no guarantees to have a higher expected retirement income. Others may be better off delaying claiming public pension benefits and using their savings to finance the interim period. Such circumstances call for more flexibility to adapt to a given context, which may not be possible for a default option to provide.
The application of a default option should also consider any available personal information that could indicate whether a certain solution may or may not be suitable. An obvious variable to consider – and one that is commonly available – is the amount of retirement savings that an individual has accumulated. Nest establishes the default threshold at GBP 10 000, under which individuals cannot access the Guided Retirement Fund. In Singapore, the threshold to be defaulted into a lifetime annuity is SGD 60 000.
Where no personal criteria are used to establish a default, the option likely to cause the least harm is a managed drawdown solution that provides regular payments to the individual depending on the account balance and potentially other factors such as age. This option usually allows for the flexibility to change or adapt if the individual decides it is not suitable for their situation. The default option in Colombia, for example, is a managed drawdown (programmed withdrawal) paying the amount that would be provided if purchasing a life annuity with the account balance in that year. In Costa Rica the default is also a managed drawdown, however payouts are positive investment returns only, which prevents a depletion of assets in retirement but does not optimise the individual’s income over their lifetime.
5.3.2. Guidance
Guidance aims to engage individuals in their decision regarding how to use their retirement savings and help them to make the decision themselves. There are various ways to provide individuals with guidance at retirement. Digital tools can help people understand the different options available and the implications of their choices in an interactive way. Choice architecture that is mindful in how options are presented can be employed to nudge people towards choosing a suitable option for their particular situation. Guidance can also be more personalised, potentially leveraging digital tools and/or choice architecture to suggest to individuals which option is likely to be appropriate given their characteristics.
Guidance that aims to engage individuals and provide them with information relevant to their situation is important because generic information about options available at retirement is often insufficient to aid individuals in deciding how to use their retirement savings. A recent survey in the United Kingdom found that 27% of individuals felt that general communication did not help at all with their decision making, with an additional 54% reporting that it only helped a little (FCA, 2023[45]). Another experimental study found that only 14% of individuals made the best decision regarding the amount to withdraw from their pension pot to meet their financial needs and avoid paying higher taxes when given general information about the tax implications of withdrawals from their retirement savings (ABI, 2023[46]).
Digital tools have a large potential to help individuals make better decisions for their retirement because they are generally accessible to most people and elicit the active engagement of individuals in considering their potential options. The individual pension tracking tool in Sweden, Minpension, offers an interactive retirement planning tool to users over the age of 54 that allows them to see the impact of choosing different payout options. The tool has contributed to an increase in the number of people choosing a lifetime income for their retirement (see Chapter 7). Pension providers are also developing tools to help their members choose an appropriate payout solution at retirement. For example, Aviva offers a tool for its Guided Retirement that provides a hybrid payout solution that aims to meet the three layers of needs described in this chapter. The product provides a guaranteed lifetime income account, a flexible account to regularly draw down until the commencement of the guaranteed income, and an accessible, liquid account to use as needed (Rajah, 2024[47]). With the tool individuals can choose what proportion of assets they want to allocate to each of the three strategies and are able to visualise the implications of different allocations. Similarly, Smart Pension offers a digital tool for its Smart Retire solution in both Australia and the United Kingdom that allows individuals to split between the three allocations and makes them think about how much they should put towards each type of need.
Using choice architecture to nudge people towards taking a good decision at retirement for their situation can also be a powerful approach to guide individuals into better payout solutions. Such an approach also seems to be welcomed by consumers. A survey carried out by Scottish Widows found that 38% of respondents preferred to be nudged towards a specific option after responding to a series of questions (Scottish Widows, 2024[48]). Recognising the potential of choice architecture, the Authority for Financial Markets (AFM) in the Netherlands published guidelines for pension providers when designing choice architecture for their members. The guidelines clarify that the AFM expects communications to be aware of behavioural biases to help improve outcomes and not take advantage of consumers. The guidelines also highlight the importance of ensuring that the variables used to distinguish different groups of members are relevant, that the products offered can be reasonably expected to be appropriate, and that individuals are provided with adequate tools to identify their own needs and engage in the decision (Autoriteit Financiële Markten, 2019[49]). The Financial Conduct Authority in the United Kingdom introduced the ‘investment pathways’ choice architecture, which requires firms to present four options to individuals approaching retirement to help them to align their choice with their objectives regarding how they would like to use their money in retirement. An initial review reported positive results, with a 50% take-up rate by members in the first quarter of 2023 (FCA, 2023[50]).
Personalised guidance aims to get individuals to consider their own situation and highlight the solution that is usually well suited to someone in similar circumstances. Such guidance can feel more relevant and helpful for individuals making decisions at retirement, resulting in better outcomes. One experimental study showed that the proportion of individuals making the optimal decision about withdrawing from their pension account increased from 9% to 64% when the guidance that explained the tax implications of the options was available and suggested an option that would result in lower taxes (ABI, 2023[46]). An example of the provision of personalised guidance is Pension Wise, a free, government-provided service in the United Kingdom that aims to help individuals over the age of 50 decide how to use their retirement savings. Guidance counsellors explain the different options available to individuals along with the tax implications and provide insight about which option might be better given their other sources of pension income, any outstanding debt, their desired retirement age, and preferences around security and flexibility. Users of the service express high levels of satisfaction, with 94% of those accessing Pension Wise in 2019-20 happy with the guidance received (ABI, 2021[51]). Around two-thirds reported that the free guidance helped them to make better financial decisions (Standard Life, 2023[14]).
While the potential to improve outcomes is significant, a major challenge in personalising guidance in a way that can lead to a suggested course of action is that the suggestion can resemble personalised advice, which is normally subject to more stringent regulation. Guidance is usually defined as any information provided that does not explicitly take into account an individual’s specific needs or objectives, though it may consider their characteristics. In this sense, it is meant to be relevant for anyone with similar circumstances. However, the line between personalised guidance and personalised advice is not always clear cut.
Because of the blurred distinction between personalised guidance and advice, the regulatory framework can often deter providers from providing personalised guidance for retirement in order to avoid inadvertently crossing the line into personalised advice. Providers of personalised advice are generally exposed to significantly more liability risk if the suggested course of action turns out to be inappropriate for the individual (OECD, 2016[52]). In Australia, personal advice involves the consideration of an individual’s objectives, financial situation or needs, or any suggestion where the individual can reasonably assume that this is the case. Many providers therefore feel that the distinction between the two is uncertain and that providers could be held liable if consumers are eventually not happy with the guidance they receive (Levy, 2022[53]). In the United Kingdom, the regulator has attempted to clarify the boundary between guidance and advice, but many providers continue to feel that the distinction is not sufficiently clear. The Association of British Insurers helpfully proposes some key features to distinguish personalised guidance from advice. Namely, rather than providing a recommended course of action, personalised advice can propose a suggested course of action for consideration, highlight relevant variables that need to be considered, reduce the range of options to those most likely to be suitable, nudge individuals towards a specific course of action, and assist them in making use of their existing resources and assets (ABI, 2023[46]). Nevertheless, as the distinction remains difficult in some situations, the FCA is considering alternative approaches to facilitate the provision of personalised guidance. One option being considered is a completely new regulatory framework covering ‘targeted support’, which would allow providers to suggest a course of action based on limited personal information (HM Treasury, FCA, 2023[43]). Important features of this new framework would include a requirement for providers to determine the type of personal information needed, to ensure that the support is likely to improve consumer outcomes, and to ensure that the individual understands the intended outcome of the solution suggested along with the risks it entails (HM Treasury, FCA, 2023[43]).
Another key challenge to ensure the effectiveness of personalised guidance is a lack of awareness or use of guidance services and tools. Only one-third of retirement savers in the United Kingdom are aware of the free Pension Wise service, and only 14% of people accessing their pension pots over 2019-20 in the United Kingdom used the service (Barrett, 2023[54]; ABI, 2021[51]). In Australia, only 18% of members are aware of digital tools to help them make decisions about their pension (Levy, 2022[53]). Those with small pots may feel that they do not have enough savings to make seeking out guidance or assistance worth it (Kotecha et al., 2020[55]).
However, nudging can also be successfully employed to encourage people to use guidance services and tools. For example, one study increased the number of members taking an appointment with Pension Wise from 3% to 11% by offering the ability to immediately book an appointment (Farghly et al., 2020[56]).
5.3.3. Advice
Financial advice is the most personalised way to ensure that individuals access suitable solutions for their retirement but it is also the most resource intensive to deliver. Individuals taking advice often report positive outcomes, yet not all people are willing or able to seek advice.
Financial advice can often lead to good outcomes in retirement. Individuals are generally positive and confident about their choices when receiving financial advice. In the United Kingdom, individuals feel that the personalisation of advice is the most important value of seeking advice, along with consulting someone who understands their financial situation and having the peace of mind that their financial decisions for retirement are reasonable (AKG, 2023[57]). Around three-quarters of respondents to another UK survey reported that receiving financial advice helped them to better understand complex financial matters and helped them to make better financial decisions (Standard Life, 2023[14]).
For some retirement products, it is clear that financial advice is likely to be the best channel to ensure that the product is suitable given an individual’s circumstances. Financial advice is often required for more complex products that may require higher levels of financial capability to determine their appropriateness. This is the case in several jurisdictions, for example, for individuals to obtain a reverse mortgage product (see Chapter 6).
However, individuals may often be reluctant to seek financial advice. Some main drivers of this reluctance are a lack of trust, a lack of awareness, and cost (Barrett, 2023[54]; Kotecha et al., 2020[55]). Around 30% of survey respondents in the United Kingdom reported that they do not seek advice because they do not earn enough, it is too expensive, or they do not have enough savings (Standard Life, 2023[14]).
Cost is a barrier not only for the demand of advice, but also for the supply. Recently, advisors in the United Kingdom have been dropping less profitable clients that they can no longer afford to serve (AKG, 2023[57]).
Digital solutions for personalised advice have the potential to improve the options offered to individuals in a more accessible and cost-effective manner than financial advice provided in person (OECD, 2017[58]). However, individuals seem to be somewhat reluctant to engage solely with a digital platform for advice. In Australia, only 37% of people who recently considered financial advice were open to receiving advice through a digital channel, and 40% felt that it would be more valuable if a person explained the results of the digital tools and recommendations (Levy, 2022[53]). Another survey in the United Kingdom indicated that 35% of individuals preferred in-person support (Barrett, 2023[54]). When asked about whether they would take financial advice from an AI tool, 36% responded that they never would, even if the current technology improves (AKG, 2023[57]). In addition, while digital solutions for retirement savings have grown rapidly, solutions for advice around the payout of pensions have been slower to emerge. Nevertheless, the market for digital advice continues to develop, and this could be a potential option to better match financial needs in retirement with the appropriate products in the future.
Policy makers need to ensure that the regulatory framework allows the design of the payout phase for defined contribution pension plans to adapt to fulfil the financial needs of individuals in retirement. The most appropriate solutions for payout will depend in part on which type of spending the accumulated assets will be used for. The role of assets accumulated in defined contribution plans in financing retirement can vary depending on country context, financial markets, and individual circumstances.
To ensure that payout design is fit for purpose, policy makers first need to determine the role of the assets accumulated in defined contribution plans in financing different needs in retirement in the context of the pension system as a whole and other sources of income in retirement. Given this role, the regulatory framework should allow for the use of appropriate products to meet the corresponding financial needs in retirement, taking into account how these needs may likely vary for different groups of people. It should also consider how to facilitate individuals’ decision-making at retirement in choosing or accessing the most suitable product(s) for their particular situation.
5.4.1. Understand the role of defined contribution plans in financing retirement
The role of defined contribution plans in financing retirement will inform the types of products that should be available to individuals at retirement. To determine the intended role of the plans, policy makers first need to understand how much individuals can expect to spend in retirement. Local context and individual circumstances will then inform to what extent assets accumulated in defined contribution plans will be used to finance essential spending, unexpected spending, or discretionary spending.
Consumption benchmarks for retirement are a useful starting point to understand how much retirees will need to spend to achieve different living standards. As a minimum, benchmarks should provide an indication of how much money people need to cover essential spending to finance basic needs such as housing, food, transportation and healthcare.
Benchmarks should account for factors that can have a material impact on the cost of living for retirees. Single retirees, renters, car owners, those in poor health, and those living in metropolitan areas will generally have higher-than-average essential spending needs.
Having a benchmark for basic income needs will allow policy makers to assess to what extent retirement savings will need to be used to complement public pensions and other expected pension benefits to finance those needs, or whether savings are better placed to finance unexpected or discretionary expenses. The sufficiency of PAYG public and defined benefit pensions will vary depending on an individual’s situation. Individuals who did not enjoy a full career as a salaried employee are likely to receive lower public benefits. Lower-income individuals, on the other hand, are likely to receive higher relative public benefits.
Once policy makers understand how much income retirees will need to finance their basic needs, they will have a better understanding of the role of assets accumulated in defined contribution pension plans in financing retirement for individuals in different circumstances, which will inform the payout options that retirees should have available to them at retirement.
5.4.2. Consider the financial solutions best suited to meeting different financial needs in retirement
The financial solutions best suited to cover essential, unexpected, and discretionary spending will differ in the risks they should mitigate. The framework for the design of the payout of defined contribution pensions will need to ensure that the appropriate solutions are allowed and available given the expected role of those plans in financing retirement. Figure 5.3 illustrates the risks that need to be mitigated for each type of spending, and the type of solution that is generally well-suited to mitigate those risks in retirement.
Essential spending to cover basic needs will require a regular, stable source of financing that potentially can keep up with inflation. As such, it should ideally mitigate longevity, investment, and inflation risks. Guaranteed lifetime income products present these features and should be well-suited to financing basic needs for those who need additional income to complement other sources of lifetime income, such as public pension benefits.
Assets used to finance unexpected spending need to be available when the individual needs them. As such, solutions providing this security need to mitigate investment and liquidity risk, and ideally should keep up with inflation to avoid the reduction in value. Assets should be invested in relatively safe and liquid investments where they can continue to earn some return but remain easily available.
Discretionary spending needs are likely to be more heterogenous, but can broadly be broken down into regular discretionary spending to achieve a certain living standard and occasional discretionary spending to finance larger purchases that allow retirees some of the comforts they aspire to. As retirees normally aim to sustain a certain living standard throughout their retirement, products used to finance regular discretionary spending will ideally mitigate longevity risk to allow individuals to optimise their spending over their lifetime without worrying about running out of assets. As discretionary spending is not essential and normally declines with age, investment and inflation protection are less important. With these objectives in mind, variable lifetime income products that offer low or no guarantees can provide a higher expected lifetime income compared to fully guaranteed products. Alternatively, managed drawdown products with a withdrawal rate set at a sustainable level could also be appropriate, potentially combined with a deferred lifetime income product to protect against longevity risk. For the more risk averse, guaranteed lifetime income products could be considered, though at the expense of lower retirement income on average.
Occasional discretionary spending will require more flexibility rather than longevity protection to allow individuals to use their savings as they wish. Flexible drawdowns that keep assets invested are therefore likely to be the most appropriate solution for occasional spending needs.
5.4.3. Ensure essential spending needs are met while considering individual and market circumstances
The minimum objective of any pension system is to ensure that individuals have a sufficient income in retirement to cover essential spending. As such, the payout design for defined contribution plans must recognise to what extent other sources of retirement income fulfil this need and aim to complement this retirement income where necessary. However, even when a complement is needed, the design should also allow for some flexibility to adapt to market conditions and individual circumstances when appropriate.
If PAYG public and defined benefit pension benefits are insufficient to meet basic income needs, assets accumulated in defined contribution plans can be used to complement the guaranteed lifetime income from those schemes.
However, while guaranteed lifetime annuities are likely to be appropriate for many individuals, this option may put others in a more difficult financial situation because of their lack of flexibility. Individuals in very poor health, those having high levels of debt, and those not having saved enough to purchase a meaningful level of income will likely be better off prioritising liquidity over longevity protection to have the flexibility to use some of their savings earlier or to put aside as a safety net for unexpected expenses. Indeed, many jurisdictions allow retirees to take a lump-sum if they have not accumulated enough savings to have a meaningful level of lifetime income. This threshold can be defined directly as retirement income that can be purchased, or alternatively proxied by the amount of assets accumulated or the number of contribution periods.
Unattractive market conditions, such as a market crash or a low-interest rate environment, may also be detrimental if individuals have to lock in a lower guaranteed lifetime income than they otherwise would have been able to obtain. In these cases, individuals may be better off delaying their purchase of a guaranteed lifetime income or considering other types of lifetime income products with variable payments.
The appropriate payout solution may also need to consider how to optimise income over retirement by varying the timing of payments. If individuals are able to significantly increase their public pension benefit by delaying claiming, a better solution may be to use retirement savings as an interim solution for financing retirement until public pension benefits are claimed, particularly in cases where public pensions will likely be sufficient to cover basic income needs if delayed.
While inflation protection for basic income needs is valuable, it may not be necessary if public PAYG pension benefits already mitigate a significant portion of inflation risk for these needs. The benefits of additional inflation protection would need to be weighed against the value for money that inflation-indexed products can offer.
5.4.4. Allow retirees to set aside a portion of their retirement savings to cover unexpected expenses
Allowing flexibility for individuals to set aside a portion of their retirement savings for unexpected expenses goes hand-in-hand with considering how and whether the retirement savings is needed to cover essential spending needs. Payout design for defined contribution plans should allow for the flexibility to keep a portion of savings aside, and recognise when this may be a priority over converting savings into a lifetime income. These needs will be higher in jurisdictions with lower public health coverage and benefits aiming to assist the elderly, as well as for those without housing assets to fall back on.
As such, the payout design of defined contribution plans should allow retirees to keep a moderate amount of assets aside to be used for urgent expenditures. This can be done by allowing retirees to take partial lump sums or by ensuring that a portion of the assets can be kept invested in a relatively safe and liquid investment. Several jurisdictions aim to provide this flexibility by allowing retirees to take a portion of their retirement savings as a lump sum. Such limits are most commonly defined as a percentage of accumulated savings (e.g. Portugal), but can also be defined as a nominal value or as a share of salary (e.g. Ireland). Many jurisdictions allow individuals with balances lower than a pre-defined threshold to withdraw their assets in one go, recognising that having access to that savings would be more beneficial for retirees than having an insignificant level of lifetime income.
5.4.5. Allow for flexibility to meet discretionary spending needs while ensuring the availability of options that provide a regular income
Payout design should allow for sufficient flexibility for individuals to use their remaining savings in a way best suited to their personal situation. Once retirees have sufficient income to finance their basic needs and have set aside funds for unexpected expenses, their remining savings can be used to finance their desired lifestyle.
High levels of retirement savings or voluntary savings in personal plans are most likely used to finance a retiree’s discretionary spending. Many jurisdictions recognise the discretionary purpose of retirement savings by allowing savings above a certain threshold to be used as the retiree wishes. In Lithuania, for example, retirees can withdraw savings in excess of EUR 60 000 as they want, though alternative lifetime income options remain available. Most voluntary personal pension plans also allow for significant flexibility in how retirees use their savings, in recognition that the primary purpose of these plans is for individuals to accumulate additional savings to improve their living standards in retirement.
At the same time, options providing regular incomes should be easily available. These solutions can help individuals to budget and spend their savings more optimally over their retirement and avoid the situation where individuals spend less than they could otherwise afford to and constrain their achievable living standards as a result. Lifetime income options are not necessarily available for all types of pension plans in all OECD member countries, though temporary income or drawdown options are normally available.
5.4.6. Establish any default option with care and only when the solution is not likely to cause undue harm
Default options can be very effective in nudging individuals into a specific financial option, but they do not engage people in the decisions about how to manage their retirement savings. This means that people who are defaulted into a particular path are not likely to consider whether that option is the most appropriate one for their particular situation.
Any default option for the decumulation of retirement savings should be implemented in a way that is not likely to cause undue harm to any group of the population. Ideally, it should allow for the possibility for the retiree to adapt if the default turns out to not be suitable for their needs. This implies that life annuities are not appropriate as a default option in most cases because they are irreversible. Features such as cooling off periods or products that provide regular incomes before converting savings into a lifetime income can provide individuals with the opportunity to experience a regular income while still allowing them a window during which to change their mind. Alternatively, managed drawdown products can provide a regular income while allowing retirees to retain the flexibility to adapt the solution at a later point in time.
Ideally, any default option should be flexible and account for market context or other relevant and available information. For example, individuals should not be defaulted into a product that locks in investment losses from which they would have been likely to recover if delaying the transfer of their savings. Similarly, if individuals do not have a significant level of savings, defaulting them into a lifetime income product is not likely to be appropriate.
The implementation of any default option for the decumulation of retirement savings should also make every reasonable attempt to inform savers of their options and engage them with the decision of how to use their retirement savings to make sure they are aware of the consequences if they fail to take any action or decision.
5.4.7. Promote awareness and education about the payout options that individuals have at retirement
There is a need for communication campaigns that highlight the importance of saving for retirement but also that inform people about the possibility for their savings to be used to provide a regular or lifetime income in retirement. Awareness and understanding of the payout options that individuals have at retirement is often inadequate for them to make informed and appropriate decisions about how to use their savings to finance their retirement. This is true even for people who are already saving for retirement. A minimum level of awareness of options leading up to retirement may help people to better engage with and understand the options presented to them at retirement.
5.4.8. Promote the development and use of digital tools to facilitate individuals’ comprehension of and access to different options at retirement
Digital tools can be a powerful means to better engage individuals with their choices at retirement by showing the implications of different options on retirement income in an interactive way. Ideally these tools should include personalised data and simulation options that reflect the individual circumstances of users. Pension dashboards, for example, which provide individuals with an overview of their expected retirement incomes, can be used to better engage individuals with their at-retirement planning (see Chapter 7). However, these centralised digital tools often only show potential or expected outcomes on average, and do not necessarily reflect the actual financial outcomes that individuals will have by selecting a specific provider or product.
Digital tools developed by providers can allow individuals to concretely view how specific product options will affect their expected income in retirement based on the actual assets they have accumulated and the specific product options and pricing available. Another advantage of such tools is that they can potentially facilitate the implementation of an individual’s preferred solution, which serves to reduce administrative barriers that can prevent a retiree’s access to appropriate solutions in retirement.
5.4.9. Leverage behavioural insights to nudge individuals towards appropriate payout options
Behavioural insights can be used to nudge individuals towards payout options that are appropriate for their situation. Well-designed choice architecture can make it easier for individuals to understand their options and to guide them towards the one that best suits their needs and preferences.
Nevertheless, supervisors should ensure that the use of behavioural insights results in good outcomes for consumers and is not used primarily for commercial gain. Nudges can lead individuals to take the path of least resistance and do not necessarily lead to increased individual engagement with financial decisions at retirement. As such, they should be accompanied with tools such as those discussed above that aim to ensure that individuals are aware of their decisions and the implications of those decisions on their finances for retirement.
5.4.10. Encourage and facilitate the provision and uptake of personalised guidance
Personalised guidance can improve financial outcomes for individuals at retirement by suggesting options that are likely to be suitable for an individual with similar characteristics. Personalised guidance still ensures that the individual is informed of all the options available and can therefore take an informed decision of whether or not to follow the suggestion.
However, in many jurisdictions the line between personalised guidance and personalised advice – the latter of which is subject to more stringent regulatory requirements – is not always clear. In principle, personalised guidance does not take into account individual needs or circumstances, only their general characteristics. Nevertheless, in practice this distinction is not always obvious, which can lead to a reluctance of providers to offer any guidance beyond generic information.
One solution could be to set up a publicly funded entity to provide guidance to people approaching retirement. The Pension Wise service in the United Kingdom is an example of this. This solution ensures the objectivity of the guidance. Nevertheless, a key challenge is ensuring that individuals are aware of the service and will take the additional steps required to access it. Procedures that encourage and facilitate taking an appointment at the time when individuals engage with their pension provider can help to promote take-up.
Other solutions aim to give providers more certainty that they are complying with regulatory requirements in providing personalised guidance. Regulators can issue more detailed guidance and clarifications with examples comparing personalised guidance and advice. They can also provide clear steps that providers would need to take to ensure and prove their compliance with the rules in place.
5.4.11. Monitor and support the development of digital solutions for personalised advice
Digital solutions for the provision of personalised advice for retirement have the potential to improve the accessibility of financial advice by reducing the cost of providing it. While many individuals see value in having personalised financial advice and evaluate the advice as having a positive impact on their finances, cost remains a large barrier for many to access the advice.
Digital solutions for financial advice are only beginning to emerge for advice relating to the decumulation of retirement savings, so need further development. In addition, barriers remain to the take-up of such solutions, as individuals often prefer in-person support and are less willing to trust a technology-based solution. Nevertheless, regulators and supervisors should monitor the developments in this space and encourage the development of robust solutions that have the potential to expand the availability and accessibility of financial advice for retirement. Ensuring that these platforms are subject to rigourous security and privacy standards and are adequately regulated will ultimately help to increase the public’s trust in digital solutions.
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← 1. Examples of non-guaranteed lifetime income products are discussed in Policy lessons for the design, introduction and implementation of non-guaranteed lifetime retirement income arrangements (OECD, 2022[59]).
← 2. Numerous composite products offering a financial solution combining withdrawals and retaining funds to purchase longevity protection exist. Some examples include Nest’s Guided Retirement Fund, Aviva’s Guided Retirement, and Smart Pension’s Smart Retire solution.
← 3. The FCA reports that in the fourth quarter of 2023, 30 395 individuals out of 367 592 accessing their pension plan for the first time used their savings to purchase an annuity, or 8.3% (FCA, 2024[42]).