Turning retirement savings into a sustainable salary replacement | Insight Investment

"Retirement income has traditionally been framed as a choice between drawdown and annuities. Flex-then-fix aims to balance the benefits of both approaches. Done well, we believe it has the potential to transform retirement."

Retirees need income they can rely on, for as long as they live, that also builds in flexibility for changing circumstances and potential for growth. Delivering this has become an urgent priority for policymakers, providers and trustees. Flex-then-fix has emerged as a possible answer, but the label can mask very different approaches.

We consider how innovative design, using established tools and techniques, could help materially improve the retirement outcomes these solutions can deliver.

• A flex-then-fix approach may be an attractive option for delivering retirement income, but the design matters. It is not just ‘drawdown followed by an annuity’. Done well, it manages underlying complexities of retirement income delivery to provide a salary-like experience that enables members to spend with confidence.
  
  
• There are four key principles that we believe are central to a strong flex then-fix design.

        1. The member should receive a simple, salary like experience

        2. The future annuity should be treated as a target from day one

        3. Growth exposures should be engineered to reflect the risks that matter in retirement

        4. Sequencing risk must be addressed explicitly

• Trustees and providers should look to answer a range of questions about a flex-then-fix approach that ensures it is focused on retirement income delivery. These will include questions around how sustainable income is calculated and recalibrated, which risks are hedged and which are deliberately retained, and how growth exposures are protected or reshaped.
  
  
• The goal of an effective flex-then-fix approach should be confidence. Confidence to spend, that income is being managed responsibly, and that later-life security is being built in from the start. We present a clear checklist for trustees and providers to consider when assessing whether a specific flex-then-fix approach can achieve such confidence.