It cited the UK, Australian and US pensions systems as those providing “considerable flexibility” for retirees. However, the research found that, in each of these systems, “there has been recognition that this 'freedom' does not necessarily lead to the best outcome for retirees”.
The UK has attempted to answer this with the nudge toward pension guidance provided by Pension Wise, while the Australian government signed into a law a Retirement Income Covenant in 2022 which requires trustees to create a retirement income strategy, addressing how the trustee will “assist beneficiaries to achieve and balance the three objectives stated in the covenant,” the Mercer report explained.
Those three objectives are: to maximise expected retirement income over the period of retirement, to manage expected risks to the sustainability and stability of retirement income, and to have flexible access to expected funds.
How to approach flexibility in DC
Overall, the Mercer reported acknowledged the need for flexibility in DC, but recommended a list of principles be adopted.
For example, it suggested that members with small pots, of up to 50 or 75 per cent of an average full-time wage, should be allowed to take these as lump sum benefits, thereby providing an option to deal with the “relatively significant costs associated with small pensions”.
It also suggested DC retirees with pension pots above the minimum should be allowed to take up to half of their initial pot during retirement “without significant disincentives”, as this would “provide them with flexibility while also ensuring that at least half of their initial benefit provides regular income”.
Half of a pension pot should be converted into an income stream, it continued, to provide regular and “relatively stable income”. The permitted income streams should include an annuity, a pooled arrangement, or a “programmed withdrawal product” that would encourage flexibility.
The report recommended the development of default retirement products that are consistent with the previous suggestions, accounting for the many DC members who “will not be engaged”.
It also stressed the need for financial education, guidance, and independent financial advice being available to all plan members approaching and during retirement.
Finally, it suggested that any reforms should be introduced gradually, as “sudden change does not encourage community confidence as many individuals and households make plans as they approach retirement”.
Mercer’s UK head of DC Philip Parkinson said: “With the cost of living crisis front of mind, all hands including policy makers, trustees and providers need to work together with individuals to improve retirement outcomes.
“Failure to address some fundamentals around auto-enrolment coverage and savings levels and the levels of household debt, will build up over time leading to a retirement crisis for ‘generation DC’.”
Mercer senior partner Dr David Knox, the study’s lead author, stressed the need for strong retirement schemes at a time of exceptional market uncertainty.
