One justifiable criticism of the pensions world is a tendency to hide clear explanation behind the convenient option of jargon.
If you’ve been reading our blogs, client communications, articles and social media posts, I’m confident you wouldn’t accuse Punter Southall Aspire of this oversight!
I raise this to explain my latest thoughts on an issue which remains widespread across the industry - the reliance on a ‘default’ option.
Triple default demystified
Default, to most people, means failing to pay a loan or to meet an obligation but it also has another meaning which is widely accepted across the pensions landscape.
Here, it is: “a preselected option adopted by a computer programme or other mechanism (in this case a defined contribution pension scheme) when no alternative is specified by the user or programmer”
In other words, a default is an action chosen for you and it’s this I want to focus on.
“Triple defaulters” (I know you know what “triple” means so I won’t labour the point) is the term used to describe the lack of choices people make about their defined contribution pension schemes.
First, they typically adopt the default retirement age of their workplace pension scheme. For most, that means 65 even though we know the state pension age will be 67 from 2028.
Many members will be in a lifestyle strategy that targets their retirement age, so adjusting this to reflect when they intend to take their benefits could have a measurably positive impact on their investments (depending on market performance).
Secondly, they (between 90 and 95 per cent, in our experience) find themselves in the default investment strategy without actively considering if this is in line with their own attitude to risk (although the default will have been chosen to meet the needs of the majority of the scheme’s members). (For more on our research into the performance of default funds, click here - you may be surprised!).
And the third element in the triple default is how much they contribute. Again, this is typically set by default. For auto-enrolment schemes, the minimum is often five per cent from the employee and three per cent from the employer.
So, your employees might ask, if someone else is doing it for me, why should I worry?
The answer is because they can alter the course their pension is taking. It’s not necessarily best left to someone else to determine their future after work. Their decisions can help to shape that reality.
There are different options, best termed as minimum, moderate and comfortable which describe how they might like to see their retirement.
Very few consciously want their retirement to reflect the bare bones of “minimum”, but may be on course for that option unless they take a more engaged approach to how they are saving for retirement.
Our concern is that while people are putting away something for retirement, the triple default tendency means that may well end up not being enough.
Debunking the default
And while we debunk the default, I also want to reframe the argument that only those who are comparatively well off can afford the advice of a financial planner and achieve that “comfortable” status in retirement.
The recent growth in guidance and accessible support to help everyone make better decisions is in plain sight. Apart from our website and my colleagues, there are so many opportunities to be better informed about your future – and people who can help.
As I’ve laid out, more always needs to be done for those who need more help and this remains a challenge for all of us.