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Auto-protection: better a “drawdown default”?

    Following the CPS’s publication of the paper Auto-protection at 55, Professional Pensions published the result of a survey which sought opinions on one of the paper’s proposals, to default DC members into annuities at retirement. This produced a 70% “no” response: worth listening to. But this does not shed any light on whether the majority of readers are opposed to there being any at-retirement default at all.   

    Auto-protection is about risk management not, for example, the elimination of choice: were auto-protection in place, one could always opt out to embrace the widely-welcomed 2014 Budget’s liberalisation concerning annuities. The concern is that post-55, some people (no idea how many) will make poor financial decisions that could put them, unnecessarily, into pensioner penury (to perhaps then fall back on the state, to some degree). Maybe the real question is whether annuitisation is the best form of default? Upon reflection, it may not be because the irreversibility of annuitisation rules out any scope for people to reconsider their position in light of subsequent emerging experiences and market developments (for example, in respect of annuity pricing). In proposing default annuitisation, insufficient value was attributed to flexibility (i.e. to not annuitising).
     
    A better approach could be a drawdown default whereby 5% of pot value is drawn down each year from the age of 55, unless the saver instructs otherwise. This would mitigate timing risk, as well as avoid savers having to relinquish control over a substantial capital sum in favour of the industry, which they are understandably reluctant to do (particularly following the 2014 Budget). They would also avoid having to pay for the regulatory costs of annuitisation incurred by providers. But, as always, the devil would be in the detail: which assets should the provider sell to raise cash, for example? In the meantime, savers would, of course, be at liberty to annuitise at any time from the age of 55, perhaps after 15 to 20 years of 5% draw downs.  

    Michael trained with JP Morgan in New York and, after 21 years in investment banking, joined Towers Watson, the actuarial consultants. Subsequently he was responsible for the running of David Cameron’s Economic Competitiveness Policy Group.

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