This article was originally commissioned for Inner Workings, a monthly column written by Tom Murray, in the August 2018 edition of the Actuarial Post.
Once upon a time, people saving for their retirement were given a great deal of support by the taxpayer. This was provided on the basis that there were severe restrictions around the money saved and that the savers would ultimately be forced to use that money to buy annuities. These would provide a guaranteed income in retirement, ensuring that the taxpayer would have far less responsibility for the retiree, and therefore was getting a good deal for the tax foregone.
However, the notion of allowing people to access the money themselves became popular. The huge amounts that were being handed over to the annuity providers was looked at enviously by those in the money-markets and a push came, under the guise of giving people freedom, to allow savers to control this money themselves in their retirement. Forced purchases of annuities were abolished and the market started to allow people to draw down their retirement savings at whatever rate they wanted. “The people know best how to manage their own money” was the clarion call, despite the fact that the difficulty of understanding financial products had been a major topic of debate for over 20 years.
Last month, the FCA published their final report into their Retirement Outcomes review, which has been undertaken over the last year and the findings are shocking. I’ll pick out just a few points that struck me. One third of non-advised consumers, were entirely invested in cash, which was inappropriate to at least half of them, as they could be getting an income up to 37% higher across 20 years by moving to a mix of assets. 94% of those accessing their pots without taking advice accepted the drawdown option offered by their pension provider compared with 35% of those who sought professional advice. Charges vary hugely from 0.4% to 1.6% and drawdown products can have as many as 44 separate charges linked to them, making it almost impossible for the average consumer to compare them. Endearingly, the FCA feel that this “might make it harder for them to make good decisions.”
So what kind of response has the FCA come up with? Well, for the regulator the answer appears obvious. More regulation. So, the answer to the struggle is to put the blame on the consumer for getting the decisions wrong or refusing to engage by giving the more information on a more regular basis. From the age of 50, the FCA want consumers to be sent ‘Wake up’ packs which are to be made more useful by incorporating a one-page headline document in clear an accessible language. This, they say, will increase consumer engagement, quoting research carried out for Pension Wise. A quick glance at this research reveals that this ‘one-page summary’ approach increased engagement by 10%, hardly an ambitious target and certainly not one that will fundamentally change the pensions landscape. It will also be a well-crafted one-page summary that can bring consumers through the maze of 44 separate charges and safely out to the other side.
The wake-up packs will also include risk warnings, which somehow, they expect the consumers to suddenly be able to understand and will also be re-sent every 5 years until retirement, giving the lucky consumers multiple opportunities not to engage with their pensions before they actually draw it down.
The truth remains that the pension freedoms are loved by consumers primarily because it gives them the option to get their hands on a lump-sum, whether they actually take it or not. Few unadvised consumers are seriously considering the original purpose of the pension which is to provide an income throughout their retirement. Therefore, the value to the taxpayer of providing the high levels of support via tax-relief is becoming questionable.
The FCA are identifying the issues arising but are then desperately trying to make it work instead of standing back and reviewing it properly. Clearly, tinkering around at the edges by providing more information to those who won’t read it and threatening to cap charges, though this approach has never succeeded in quashing providers ability to come up with new innovative ones, smacks of desperation to make something work rather than a focus on really trying to get the best outcomes for pension savers. Perhaps at the beginning if they had concentrated on making the annuity system work, we would now have far more people who were guaranteed their income throughout their retirement.
In the meantime, the pension nest eggs keep falling off the wall and the FCA will continue to apply band aids rather than actually addressing the stability of the wall in the first place.