The Chancellor’s Budget day announcement that the Government intends to scrap most of the restrictions which govern how people can receive their pensions savings has turned the world of workplace pensions on its head.
The fact the changes were so unexpected means that three months on, the industry is still figuring our exactly what they will mean for workplace pensions and advice.
Chancellor George Osborne’s plan means that pension savers will have almost total control of their pensions assets from the age of 55 has the potential to completely change the way that employers and employees view workplace pension saving.
At last month’s Corporate Adviser roundtable, New Models, New Relationships: The Brave New World of Workplace Pensions, intermediaries were unanimous in the view that the changes will help to change employers’ attitudes to pensions as they will be seen as much more desirable by their employees.
JLT Employee Benefits director Mark Pemberthy said: “It is genuinely very exciting that pensions have suddenly become a real savings scheme.
“It will help to engage employees. It will also reinvigorate employers to a degree because pensions will be something that is genuinely attractive to their employees if promoted in the right way.”
Capita Employee Benefits head of DC consulting Gary Smith said the changes will also prompt some employees to review their benefits programmes, including looking at other types of workplace saving schemes.
Smith said: “It is a bit tongue in cheek but I don’t think we should be using the word pensions anymore, it is a savings scheme. In fact, arguably we shouldn’t be talking about retirement because access at 55 is not retirement for most people.
“This is now a long-term savings scheme and employers are starting to sit back and think, if I am offering a long-term savings scheme, why am I not offering other forms of saving schemes?
The Government included a new Pensions Bill in this month’s Queen’s Speech to introduce its planned changes but the industry is still waiting to see the details of how the new pensions income rules will work and how existing products and retirement strategies will fit into to the new regime.
If the changes come through as they have been outlined, some advisers point out that this opens up a huge need for advice to ensure any pensions assets are withdrawn most efficiently.
Cullen Wealth director Karen Robinson said: “This is a great opportunity for advisers to engage with clients. It is a massive tax planning and retirement exercise.”
However, there are concerns that unless the rules surrounding drawdown are amended, many people will see no change to how they can take their retirement savings.
Pemberthy said: “Initial communications indicate that the drawdown element will still be broadly under the same regulatory regime. If that is the case, then that is still a massive barrier. It doesn’t mean that all of a sudden someone with £60,000 is suddenly going to do into drawdown, they would still need an adviser to access a drawdown product from a provider, trustees are not necessarily going to have to provide that.
“So unless the regulatory environment moves with the statutory one then in the short term it might not give rise to much other than frustration.”
The changes raise the prospect of new pensions products being developed to take advantage of and new freedoms but there is unlikely to be much process until the new rules are close to be finalised.
Aviva head of policy for pensions and investment John Lawson said HMRC and the Treasury currently appear keen to keep drawdown and annuities in place.
Lawson said: “It depends where the tax legislation lands, as well. The initial discussions suggested they want to retain definitions of drawdown and annuities.
“I have been saying you don’t need that, you’ve got a tax wrapper. All you are interested in is how much tax is collected when money escapes from that wrapper.Brian Gabriel, Aviva
If the changes do allow anyone past the age of 55 complete freedom in how they access their pension savings, this opens up some intriguing ideas for future pension products, such as a drawdown product that allows people to withdraw their funds from an ATM machine.
Pemberthy said: “It would be an impressive feat of administration. But if you look at the way technology and people’s expectations have changed over a short period of time, that could end up being a norm for accessing pension funds in 20 years time.”
Despite the promise of more choice and freedom, many advisers feel that a large number of pension savers will still opt for a cautious approach to pension income and this means it is far from the end of the road for annuities.
Jelf Group head of employee benefits Steve Herbert said: “Annuities won’t disappear. They will just become more flexible in how you select what you take out.”
Others expect new products to be developed.
Barnett Waddingham associate Martin Willis said: “I don’t know what those products might look like but it is interesting to hear some of the voices from the membership of pensions schemes, getting a feel for what they might want.
“One of the things that keeps popping up is some form of guarantee. Annuities were perceived as not necessarily being great value but that doesn’t mean people don’t want some form of guarantee of how long there income might last for.”
Allowing people complete freedom over how and when they take pensions income raises concerns that some people will be so cautious they will not spend their assets and have a much poorer retirement as a result.
It also raises the problem of what happens if they end up running out of money using a poorly planned pseudo-drawdown strategy.
Premier Benefit Solutions director Martin Thompson said: “There needs to be some clear signposting for people that they are going to run out of money. There needs to be a traffic light system – very simple. If you keep going as you are, you are going to run out of money in the next two or three years. Or you are ok, you are on track. The biggest risk is that if someone makes a decision and then five years later they look to someone to blame.”
The new rules are expected to increase the divide between people who have engaged with their pension and those who haven’t and the advice process and any new products will need to meet two quite polarised markets.
Thomsons Online Benefits consulting director Matthew Gregson said: “Auto-enrolment has not created pensions engagement. We have not got millions of new members who have turned round and said ‘you know what, I am going to start actively investing now that I have this three pounds a month going in’. So why do we assume that coming out the other side we are going to have anything other than a default?
“Then we need to find a solution for employers and employees who want to engage. There is no middle ground, there is no spectrum.”
Dealing with these diverse groups will need a change in the way savers are communicated with, as the old pensions model of save in your employer’s scheme, choose your retirement income and then effectively forget about it has changed.
Willis said: “It just is not ok to say ‘Are you ready to retire? You need to think about what you are doing’. You need to think about what you are doing up to 15 years before hand and then now you have to think about it continuously afterwards as well. I don’t think we can just turn this on and expect people to make the right decision at that point.”
n this light, the Chancellor’s promise of a guidance guarantee to help people make the right decision at retirement looks ambitious.
Herbert said the new system is going to be stunningly complex, which makes any guidance very difficult to provide. “That is why the guidance guarantee is a bit bizarre. You are suddenly telling them you have got to deliver a guidance guarantee, when they did not have to before when it was reasonably easy.”
Regardless of the final form of the Chancellor’s surprise pension reforms, the way pension schemes are designed and how pensions advice is given is likely to change.
Pemberthy said: “The decumulation piece will end up being part of the scheme design. It might be more mix and match, it might be more open architecture and unbundled or it might be commodised and end to end.
“The value add thing comes from education and engagement, so what communication and support you are providing outside and is that generic support or go to the lengths of dropping in wealth management and advice.”
“That is where you have different business models. Some will be unregulated, broadly generic and supportive and others will integrate regulated advice at touch points and charge a premium.”