Conversations with ChatGPT - The Future of Retirement Saving in the UK
28 Sep 2023
Not all information in this article will be completely accurate. ChatGPT currently has access to internet data up to September 2021, meaning that information produced after this point may not be represented in its answers. These articles are an experiment to test how ChatGPT responds to different questions that it may or may not have clear, accurate answers to.
Angela is a persona created to converse with ChatGPT.
I have worked in the financial services industry for the past 20 years and a vast amount has changed in that time. As a system that can sample vast quantities of information, far past that of any human, ChatGPT (or other generative AI models) can certainly provide some interesting insight with regards to emerging trends.
I’m keen to see what ChatGPT thinks the future of retirement savings looks like in the UK – 20 years from now.
Where will we see the greatest changes of behaviour in consumers saving for retirement in the UK over the next 20 years?
ChatGPT replied:
Here are 5 areas where we may see the greatest changes in retirement saving behavior among UK consumers over the next 20 years:
1. Increased reliance on defined contribution pensions vs defined benefit pensions. As defined benefit pensions continue to decline, consumers will need to take more responsibility for saving in defined contribution pension schemes. This requires more active planning and engagement.
2. Later retirement ages. With rising life expectancies and changing norms, people may work and contribute to pensions for longer before retiring. The state pension age is already increasing.
3. Increased use of auto-enrollment and auto-escalation. To overcome inertia and lack of engagement, features like automatically enrolling employees into workplace pensions and automatically increasing their contributions over time could become more prominent.
4. Rise of intergenerational products. Products that allow younger family members to contribute to the pensions of older relatives may gain traction.
5. Focus on drawdown phase. With fewer annuities and guarantees, consumers will likely need to take a more active approach to managing pension assets in retirement, rather than just receiving a fixed income. This will require planning.
In summary, consumers will likely need to take more responsibility for actively managing pensions over their lifetimes. Automation and new products may help overcome barriers like lack of understanding and engagement. The choices made will have a big impact on retirement finances.
Given current trends, I think its fair to see that this is a relatively accurate summation (or as accurate as we can be when looking into uncertain futures). I’m slightly surprised to see a lack of mention of ESG investments given the growing awareness of climate change and social issues, which is likely to only become greater. I’m also surprised at no mention of the Pensions Dashboard , as more individuals become reconnected with lost pensions.
Another aspect which has flagged up to me is the mention of fewer annuities in the fifth point. In fact, in 2023, annuity sales have reached their highest levels since 2015, due to the demand for a guaranteed income against market uncertainty. ChatGPT would obviously not be aware of this given that it is only updated to September 2021, but I’m keen to see how it reacts to this new information.
If strong annuity sales continue, how could this affect point 5 of your previous answer?
Here is ChatGPT's response, in light of this new information:
You raise a good point. If the demand for annuities continues to increase over the next 20 years, contrary to my original prediction, it would affect the retirement drawdown phase in the following ways:
1. Reliance on annuities for guaranteed income in retirement may reduce the need for consumers to actively manage pension assets. More retirees may opt for the security of annuities rather than drawdown.
2. However, annuity rates and features could fluctuate over time. Consumers may still need to actively shop around for the best annuity products as they near retirement.
3. Equity release products could decline if more retirees choose annuities over drawdown. But these may still be used to supplement annuity income.
4. Drawdown is likely to remain an option even with more annuity uptake. Consumers close to retirement may still divide assets between annuities for secure income and drawdown for flexibility.
5. Financial advice and planning around decumulation strategies may increase to find the optimal balance between annuities, drawdown and other retirement income sources.
So in summary, if annuity demand persists, the management of pension assets in retirement may require less active oversight for some, but the retirement income planning process could still involve important active decisions around annuity features, drawdown and equity release. I appreciate you raising this alternate scenario for me to consider.
Very interesting. I’m also keen to get some more insight on the intergenerational products as mentioned in the first answer. What does ChatGPT predict with regards to these?
Returning to your original list, why might there be a rise in intergenerational products and how might this affect the UK pensions industry?
There are a few key reasons we may see a rise in intergenerational pension products in the UK:
1. Demographic trends - With an aging population and increasing life expectancies, younger generations may need to financially support older relatives in retirement. Intergenerational products facilitate this.
2. Declining home ownership - Younger generations struggling to get on the property ladder may not benefit from rising house prices. Intergenerational products allow families to collectively invest in retirement.
3. Tax incentives - Products that allow pensions to be passed on tax-efficiently could be attractive. The UK pensions industry may lobby for tax rules that incentivize intergenerational saving.
The growth of intergenerational pensions could significantly affect the UK pensions industry by:
1. Creating demand for new product development and offerings that accommodate multi-generational saving.
2. Providing opportunities to engage younger demographics who are currently under-saving for retirement.
3. Adding complexity around long-term retirement projections and asset management across age groups.
4. Requiring adjustments to advice and planning models to incorporate wider family assets and retirement goals.
It looks like there is a good deal of innovation to come if intergenerational products do increase in popularity, as discussed by ChatGPT. It’s an interesting step towards addressing the societal challenge of supporting retirement finances across an ageing population. To be fully satisfied, I need more information on the adjustments required for advice and planning models, as mentioned in the final point.
What could the necessary adjustments be for advice and planning models to incorporate wider family assets and retirement goals?
Incorporating wider family assets and retirement goals into financial advice and planning models would likely require adjustments in the following areas:
1. Taking a more holistic view of the family unit's overall assets and liabilities rather than just the individual. Advisers need visibility on asset ownership across the family group.
2. Setting retirement goals and projections for multiple generations, not just the individual nearing retirement.
3. Modelling various scenarios for collective pension contributions and withdrawals. Options to optimize tax, inheritance, and income for the family unit can then be assessed.
4. Adapting advice style to engage multiple family members in the process. Communication and counseling skills are key.
5. Ongoing tracking and management of a family's collectively pooled assets versus those belonging to each individual.”
Overall, there is a shift from personal finance to familial finance planning required, which will certainly demand better financial modelling capabilities as well as softer relationship management skills from advisers to handle what may be sensitive conversations around inheritance and asset ownership.
All in all, it looks like the pensions landscape will be just as different 20 years from now as when I started my career in pensions 20 years ago. The rapidly rising population will only exacerbate these differences, I’m sure, especially when taking into account the rise of ESG, delayed or partial retirement, not to mention new initiatives such as the Pensions Dashboard Programme.
The future looks interesting!
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