Pensions tend not to be a hot political issue. In the latest edition of YouGov’s issues tracker, the proportion of people saying pensions was among the three most important issues facing the country was a paltry 6%. 

But beneath the dull exterior of pensions policy, there is an intriguing political debate at play. In 2015, the Government introduced new ‘Pension Freedoms’ allowing anyone aged 55 and over to access as much of their savings from their defined contribution schemes as they wish. The reform removed the requirement to buy an annuity, meaning that people can opt to take out their savings as a lump sum rather than as a fixed income. When it comes to accessing savings, or ‘decumulation’, we are undergoing a radical experiment in individual responsibility.

The other side of the pensions coin is ‘accumulation’, or the process of building up one’s pension pot. On this, though, there is much less flexibility. Since 2012, a system of ‘auto-enrolment’ has been in place, which now covers over 10 million workers. The scheme makes it compulsory for employers to enrol every eligible worker into a pension scheme. The minimum contribution level has steadily increased, and recently reached 8% of a worker’s pensionable earnings, including a minimum 3% employer contribution. 

This apparent tension between paternalist accumulation and highly individualist decumulation policies uncovers a deeper question: to what extent can people be trusted to manage their own pensions? 

Certainly when it comes to accumulation, the evidence seems to be that people are unsure about how much they need to save for retirement and many aren’t saving enough. A survey from the Pensions and Lifetime Savings Association shows that four in five people are not confident that they are saving enough, whilst around half incorrectly think that the auto-enrolment minimum pension contribution level is the “recommended amount” to save. Meanwhile, only 42% of working-age respondents report that they understand enough about pensions to make decisions about saving for retirement. 

This confusion is translating into undersaving. A generally accepted rule is that someone starting work at age 22 will need to save around 15% of their annual salary to ensure comfortable living standards in retirement. However, the majority of workers are not making anything close to this level of contribution. The latest data show that in 2018 (before the increase in the minimum total contribution came into effect) only 43% of private sector workers made personal contributions of 3% and up, and less than 10% of workers personally contributed 7% or more. 

Worryingly, the World Economic Forum recently found that the gap between pension savings and what people need for an adequate standard of living when they retire – the ‘retirement savings gap’ –  currently stands at $8 trillion in the UK and is set to rise by 4% a year to $33 trillion in 2050. One consequence is that retirees in the UK can expect to outlive their savings, by 10.3 years for men and 12.6 for women. 

There are some indications that auto-enrolment has had a positive impact on savings habits. The Scottish Widows ‘Adequate Savings Index’ shows a jump from 45% of people saving adequately for retirement in 2013 – just after auto-enrolment was introduced – to 55% in 2018. But there is clearly much more to be done to put accumulation for pensions on a sustainable footing, be that through increasing awareness or, as some have suggested, increasing the mandatory contribution rate further and rebalancing contributions to a 50:50 split between employee and employer. 

What, then, about decumulation? First, it is clear that Pension Freedoms have been immensely popular. Half of workers over 50 prefer a ‘phased approach’ to retirement, which involves taking part of your pension while continuing to work. This is something that Pension Freedoms facilitate. Between the introduction of Pension Freedoms in April 2015 and September 2017, over 1.5 million defined contribution pension pots were accessed, and 72% of those who accessed their pots did so before the age of 65. 

Second, the widespread fear that retirees would use their newfound freedom recklessly appears overblown. For instance, most people opening drawdown accounts do so following advice. While the Financial Conduct Authority (FCA) found that 55% of all pots accessed were fully withdrawn, the vast majority of these were small pots of £30,000 or below and 94% of those who withdrew in one go had other sources of retirement income. In short, people appreciate having greater control over their retirement and tend to use this control sensibly.

That is not to say all is well. Among the FCA’s findings was that a third of pots used for drawdowns were accessed without advice, up from 5% before the introduction of Pension Freedoms. One in three consumers who have gone into drawdown are unaware of where their money is invested, while many take the “path of least resistance” by staying with their provider without first shopping around, or directing their pension pots into cash ISAs and other low-return bank accounts. This lack of consumer engagement not only leads to suboptimal investment outcomes for individuals but, as the FCA warns, leads to a lack of competitive pressure on providers. 

The 2015 Pension Freedoms started a revolution in terms of choice and flexibility in the pensions system. It is clear, however, that this revolution is far from finished. There are good reasons to be optimistic with regards to decumulation. But it requires a strong foundation of a well-informed and engaged workforce in the accumulation stage. Until workers are much better engaged and informed about pensions than they are now, a liberalised decumulation system will have to coexist with a more controlled accumulation system for some time yet. 

Sam Robinson is a Research Assistant at Bright Blue.