A tale of two countries encountering retirement income needs

Societies are not apples-to-apples comparisons as they are impacted by different social programs and cultural norms. Yet, human nature has a few common tendencies and it is interesting to note the opposite occurrence regarding retirement annuities in the UK and US. Both countries have slower recent population growth according to national statistics offices (0.5% and 0.35% respectively) and aging populations. One has reversed an annuity mandate at retirement, the other introduced an optional annuity purchase ability within a contribution plan.

UK

Compulsory annuitization was reversed in the UK in April 2015 with pension freedom reforms. Individuals optionally invest, cash-in or annuitize their savings at retirement. This regulatory change provides an interesting study for the US market which, with the US SECURE Act of 2019 effective 1 January 2020, created a gateway to adding annuities as a retirement plan investment.

As the story unfolded, without a mandatory purchase of an annuity UK retirees often take the cash foregoing the income annuity. The government offered free pensions guidance.  A qualitative study from the UK Department for Work & Pensions found individuals did not generally tap knowledgeable guidance and did not consider the likely length of their retirement, income requirements or potential pension income until close to the point of retirement. Funds were spent on non-retirement expenses, such as immediate income requirements or adult children’s needs. A spectrum of socio-economic profiles produced a variety of use cases.

US

Section 204 of the SECURE Act created a Fiduciary Safe Harbor Provision for plan sponsors to select lifetime income providers inside of qualified retirement plans, for example defined contribution plans. Corporate plan sponsors concerned about employee liability avoided annuities. Due also to the complexity in product selection, today fewer than 10% of plan sponsors have annuities as a 401k investment option.  Even still, given a history of sales abuse, an array of products and features most investors do not understand, and a lack of disciplined financial planning, few US individuals opt for purchase annuities generally.

New legislation opens the door to investor education on annuities

Corporate plan sponsors are not rushing to the gate to add in-plan annuities, 37% of plan sponsors are not at all interested in in-plan annuities and only 49% are moderately interested. It takes an abundance of time to assess, formalise, and select appropriate products—and educating employees will fall upon employers. Firms are also likely to wait and observe others’ experience. The call might come, however, as employers are learning new generations of workers are shifting the perceived value and type of benefits offered by employers. Children have watched their first-generation parents struggle having lost the safety net of corporate defined benefit plans.

Of course, regulatory details are still in flux and changes firms are likely to wait for the dust to settle. In 2021, a House Committee approved the “Securing a Strong Retirement Act of 2021″ Bill, or Secure Act 2.0, for Congress consideration. The new bill adds flexibility for individuals for tax, withdrawal, and timing needs. The Congress House and Senate will now there turn to review; this could take a while. Meanwhile, the 2020 annuity sales market was not a good one. According to the insurance and financial services trade association LIMRA, total annuity sales fell 9% in 2020 to $219bn (£158bn) in a low rate environment. The fourth quarter saw a 2% increase over 2019. 

Guidance is a must-have

Companies offering employees options is generally a good idea. Options make for happy employees satisfying varying needs with customised benefits. However, most employees do not have authoritative guidance for retirement planning decisions. Just as in the UK situation, even those who do have access do not take advantage of the offer. Companies struggle with simply getting contribution plan participation from employees, although automatic enrolment with optout has helped.

Financial planning and investing are complicated, and ultimately left as the employees’ responsibility.  Access to a competent advisor is critical, yet most Americans cannot afford a consult let alone lifetime consultations. The US government, corporate plan sponsors, and insurance firms will need to do more than make the products accessible. Broad education is paramount. Advisers educate clients, guide them and sometimes even push them to the goal post.

The future is open-ended

Fortunately, the future is open-ended. Innovation continues to disrupt and transform the wealth market. One can imagine future employees offered investment and annuity solutions packaged to their unique financial profile and lifestyle. Perhaps a comprehensive financial plan digitally prepared and navigated by artificial intelligence advisors for the mass market. Kudo’s to robo advisory platforms which carry professional investing but not uniquely customised financial planning experiences.

Advisors for their part, regardless of their firm affiliation or product preference, are marching toward holistic financial wellness, including complex insurance product advice. Shortfalls in retirement savings across the age spectrum will require knowledgeable advice with sharp financial planning technology to prioritize, analyze, and strategize a solution.

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