The outgoing FCA chairman Charles Randell recently alluded to policymakers’ failure to protect individuals from the risks inherent in pension freedoms, and the lack of policy coordination within the Treasury, in one of his final speeches.
Many workplace pension professionals would agree and then some. Many positives have come from pension freedoms, but some of the outcomes flowing from the reforms introduced in 2015 are regarded as more than a little unfortunate even to point of value destruction.
The auto-enrolment reforms are generally seen as much more of a success, but even here there are worries that many people on minimal contributions are under-saving and most likely unaware they are.
Short of radical reforms such as reintroducing an income requirement at retirement or mandating higher contributions, the onus is likely to fall on the pension sector and trustees, in particular, to do more variously in terms of defaults, signposting, guidance and advice.
More cash
Some believe we also need a dramatic change in mindset.
Damian Stancombe, partner at Barnett Waddingham, who also heads the firm’s creative communications agency DrumRoll, says: “We almost need a reaffirmation of the pension as a long-term saving vehicle. It is not about racking up a lot of debt before retirement, and using your pension to pay it off or taking the extended family to Barbados. You can burn through 25 per cent of your finite capital. Pension freedoms have a lot to answer for.
“People have had more cash than they ever imagined. We are trying to put the genie back in the bottle. That is the magnitude of the task. Talking about trustees, we have to put back into play an adult relationship not a paternal relationship. That will take a lot more hard work. People aren’t stupid but the narrative scares the living daylight out of them.”
He says we have to be careful not to underestimate the individual, but at the same time need to get a message of ‘converting pot to pay’ across, adding that with the best will in the world the state pension may not cover even basic needs.
“We have to educate people about the gap between their level of expectation and reality and warn them they may spend a long time poor otherwise.”
He sees trustees’ roles largely as making sure the vehicle is fit for purpose but also in ensuring that tools are not just shiny, but actually used by the intended population.
Retirement solutions
He adds: “When I started, 90 per cent of the effort was getting people into the pension, and 10 per getting the right annuity. Now it is almost zero effort getting them in and we are still spending 10 per cent on retirement solutions. But that needs to be almost 100 per cent. That one poor decision can negate years’ worth of saving. I have seen studies saying 10 years can be lost in a single decision probably made in good faith but with poor information.”
There is a debate about advice, guidance, defaults and more and evidence that schemes are increasingly facilitating some of these. Some experts have a preference.
PTL client director Richard Butcher says: “It is an area of value degradation and an area of risk. There are only a few levers members can pull in order to improve their outcomes. One is contributions, the second is when they retire, and third is the decisions made at retirement.
He says with advice there are three obstacles – limited supply, trustees lacking the money to pay for it and having to make a case to employers while, even when directed to advice, people can be reluctant to do so.
“I advocate a different approach, which is let’s not try to give people advice because of these formidable obstacles. Let’s have defaults that will nudge them in the least-harm direction. We can provide advice if they want it, but a strong series of nudges and a default set of behaviours that rely on inertia can lead them to a least harm-environment. It won’t be optimal for everyone, but it will be better.”
Corporate advisers say that trustees are increasingly providing some form of help.
Signpost solution
Aon’s recent Better Outcomes by Design survey found that 39 per cent of schemes currently signpost a financial adviser firm for advice at retirement, with a further 19 per cent planning to do so in the next three years.
Some 67 per cent of respondents provided a retirement guidance or annuity broking service and 18 per cent plan to introduce this type of service within the next three years.
The next most popular type of support was access to pre-retirement workshops at 46 per cent while 17 per cent of schemes now offer drawdown at retirement via an external master trust.
John Foster, partner at Aon, who leads on DC client relationships, says: “We see a trend for schemes to provide preferred drawdown and more schemes pointing to IFAs at retirement. There is a substantial change.
“The final piece of the jigsaw is who pays for it. Unlike DB where a large proportion get funded advice, I do think making advice available and helping with funding is key. That may be making the pensions advice allowance available from members’ own pot more widely available to members more widely.
“The importance of advice is readily understood by the member at retirement. When they ask what do I do now? How can I find my way through this maze?”
What of regulation? Foster says that at-retirement represents something of a crossing of the streams and that the way the FCA and TPR are working together is very encouraging.
However, he notes that recent clarification published jointly by the regulators last year regarding signposting and guidance may actually have put off some schemes and led them to worry they might be crossing the line even when they were not in reality.
Personalised guidance
Perhaps, it needs change rather than clarification.
Consultancy The Lang Cat’s director of public affairs Tom McPhail sees such change on the horizon.“There is a widespread view across the industry that there needs to be more regulatoryaccommodation for personalised guidance which at present sits uncomfortably close to advice. With the forthcoming Financial Services Act capitalising on our withdrawal from the EU and Mifid II and the expected transfer of rule-making from parliament and legislation across to FCA regulation, the industry is crossing its fingers things may be about to change. A key development would be the introduction of guided income withdrawal strategies, to complement the FCA mandated investment pathways.”
He adds that the DWP is about to consult on what more should be done, including investment pathways for trust-based scheme members. Meanwhile a stronger nudge to Pensions Wise has been confirmed.
The wheels do seem to be moving. Trade body TISA has been doing a lot of work on these issues talking to both regulators and the Treasury.
TISA head of retirement Rennie Biggins says: “From an accumulation perspective we need to look at how to get people to save more money from a mandated perspective, but I can understand why there is reticence to do that given the cost-of-living crisis. We do need to generate an awareness that 8 per cent isn’t enough or provide a realistic perspective on what it can achieve.
“Decumulation is much more of a personalised journey. It is very hard to put in defaults with so many different avenues, but we need to do something. We nudge people and push them toward guidance and advice but once they are in drawdown, they don’t really get any support and typically financial capability is the first cognitive capability that declines.
“People are going to need extra help and support and this is where personalised guidance comes into it. What firms want to do is use some of the information they have stored to help them personalise the guidance and make it more relevant. We are not talking about personalised recommendations, but with our advised guidance boundary work, we would allow firms to offer personalised communications, looking at a risk profile and perhaps suggesting some funds. It might be guidance about income and sustainable withdrawal levels.”
He says, among other things, firms would have to apply for the permission with an authorisation regime from the FCA and for trusts from TPR to ensure there are no bad actors.
“The regime itself should be aligned to the consumer duty and principles based but to have governance in place to provide the regulators with a level of comfort. Particularly for accumulation, but also across the whole journey.”
“I would say we are cautiously optimistic. It’s been three years now, but we believe we are in position of being listened to and understood. We are not saying this is a definite yet, but the door is ajar.” In terms of that reform, Royal London’s director of policy and external affairs Jamie Jenkins says change needs to come on the guidance boundary not the advice one.
Process breakdown
He says: “We know those who take up guidance value it very much. But it tends to conclude either with a question or a dilemma when they say ‘what should I do?’ At which point you say ‘you need to speak to a financial adviser’. That is, to me, where the process really breaks down because there isn’t much in between. We have heard digital advice is the answer. I think the consensus is that is not the totality of the answer.
“There is an appetite from regulators to look at this again. Yet I suspect this is not about the advice boundary but more about the guidance boundary – to extend guidance to be something more useful.”
Currently you can indicate to someone that 7, 8 or 9 per cent withdrawals each year are unsustainable as guidance. To answer the next question about ‘what is a sustainable withdrawal rate?’, could currently cross the threshold into advice.
“Part of the problem is that we are very focused on what you can’t tell people, what you can’t do, rather than what you can. Is there a rule of thumb we could have to give someone a reference point on what they can take out? Then you can apply that logic across the range of questions customers might ask you,” he adds.