26 Nov 2019 3 min read

Working longer needn’t confirm DC members’ pension fears


Members’ doubts about not having enough to live on after retirement are causing bouts of ‘reckless prudence’. Presenting a broader set of pension options, earlier, may assuage them.


A recent article by our Head of Investment Strategy and Research, Ben Bennett, about negative global bond yields, $15 trillion of debt, and retirement anxiety (yes, cheery stuff!) got me thinking about members who might be approaching their retirement with mixed emotions.

While I doubt many new retirees will be anxiously thumbing the financial pages and tut-tutting about inverted yield curves, they might well be worrying about how long their money will last and where it should be invested to get a decent return given low interest rates.

Ben cites the classic economic life-cycle hypothesis: that because people save in middle age and consume when they retire, an ageing society will be inflationary. He then challenges this by looking at Japan where, despite a sharp rise in old-age dependency over the past 60 years, inflation has fallen steadily.

While this appears economically counterintuitive, there are reasons for it: people are living and working longer, so there is a larger pool of labour which should be disinflationary. Also, if they are drawing more on wages than savings, this should lower the inflationary impact of ageing.

Freedom and choice…to work longer

We identified that working for longer would be increasingly prevalent some time ago while thinking about the retirement landscape after the government’s ‘freedom and choice’ reforms (which determined that retirees no longer had to purchase an annuity and could instead take their pension in different formats, including drawdown through staying invested and a tax-free lump sum of 25%).

People are likely to be working longer (if they have that option) for a variety of reasons: to bridge the gap between their expected retirement and the state pension age (now mooted to be moving out to the mid-70s); to supplement their income; and to remain gainfully employed for social as well as economic reasons.

But is part of this trend reflecting anxiety that they won’t have enough to live on in retirement? This may well be the case in Japan, as Ben’s paper suggests. While there are other possible explanations (such as a low state pension, or rising health-insurance rates), it seems that people may well approach the third stage of life with some trepidation, leading to what we describe as reckless prudence – under-spending for fear of running out of money before the end of their life.

Given that the majority of defined contribution (DC) savers are in a default fund and are not highly engaged, it isn’t surprising they face retirement with some trepidation.

Ignoring is not bliss

Our research certainly revealed that members who are approaching retirement confessed that it was ‘scary’ to think about how they would manage financially in retirement and that they preferred to ignore the question until it was absolutely necessary to think about it.

This is why offering members who are near retirement the chance to consider their options in a safe experimental environment is vital. The Financial Conduct Authority’s recent Retirement Outcomes Review does much to focus on undesired outcomes (de-risking to cash and staying in it for drawdown) and offering members choice in the shape of four pathway options, much akin to LGIM’s Four Pots.

Our member research showed that it is possible to address people’s anxiety about retirement – and that giving them choice and control over their future was a good thing.

As more people retire principally on DC pensions, the importance of helping them think productively about their future selves might not only be a good thing for them but also for the economy, as spending rather than saving while people age helps smooth the life-cycle.


LGIM contributors