The defined contribution (DC) market must embrace innovative thinking if its members are to receive the income they’ll need in retirement, a report by Hymans Robertson has said.

‘Risk sharing: an age old solution to an age old problem’ has said that greater innovation in the options offered by providers and financial advisers to pension savers could increase their retirement income by 20%.

For the majority who are reaching retirement with less savings than required for a good standard of living, this change could be a lifeline.

The report outlines a number of options that could increase the sustainable income people can draw from the pension pot, allowing them to plan their spending with confidence and reduce the risk of running out of money.

Some of these ideas are tried and tested, in annuities and drawdown, with other ideas, such as collective DC (CDC), emerging. Other ideas listed in the report such as longevity pooling and deferred annuitisation are yet to be developed.

‘Risk sharing’ also recognises that a blended approach of these ideas could be the optimal outcome for members.

Senior partner at Hymans Robertson, Jon Hatchett, said: “Millions of people in the UK are heading towards retirement outcomes that are worse than their parent’s generation. The PLSA’s Retirement Living Standards maintain that a moderate standard of living in retirement will cost about £23,000 per annum, a target that is currently out of reach for most. This is far from ideal. Members will be simply losing out on the chance of increased income in retirement by the industry’s inertia and resistance to change the ways in which DC pension are accessed.

“It’s been eight years since the introduction of Freedom and Choice which completely altered the DC pensions landscape. Drawdown remains by far the most popular choice for retirement, yet it does not give a typical retiree any way to efficiently manage their pension pot. Any individual, whatever their life expectancy, might spend a year in retirement or 40 years. And they cannot know in advance. This longevity uncertainty trumps investment volatility for most DC savers.

“Each year, UK retirees are ever more reliant on DC pensions. For most this income will be insufficient as they haven’t saved enough, and are unlikely to be able to, even if they increase their contributions now. It might be too late for those in their 50s and 60s to save enough, but not too late for the industry to help. Risk sharing can allow these people much better ways to manage the uncertainty of how long they will live, and for those that choose to prioritise spending while they are alive, increase their income in retirement by around 20%

Head of DC markets at Hymans Robertson, Paul Waters, added: “There should be a real onus on the providers, regulators and the wider pensions industry to focus more resources to develop ways to help DC members with this problem and to help them extract more value from their DC savings. But the clock is ticking. To help members who are really going to need the increased income, the work now must be done now. Many members in this position will have moderate incomes and not be able to access advice. So, the industry must provide defaults that don’t require active engagement in the decision making by the member.

“Providers and the pensions industry need to quickly develop some of the ideas that are emerging into tangible solutions. This will deliver retiring DC savers increased incomes when they’ll need it. Risk sharing presents an opportunity for the industry to do this. The various flavours of risk sharing must be supported with innovative thought and investment. With just a little more work by providers and schemes to design and implement new ways for DC pensions to be accessed, this problem could be solved.

“While CDC is one approach, it is not the only answer. Other options are available that have the potential to deliver more value to savers, at arguably lower long-term risk, and can be implemented today. The Government and regulators’ single-minded focus on CDC risks missing the bigger picture.

“As an industry, we cannot afford to get this wrong for savers.”

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