Policymakers are intent on bringing more order to the recently-liberated post-retirement market, but the industry may already be innovating solutions around advice and guidance taking the market in a different direction.
The Work and Pensions Committee’s final report on Freedom and Choice, published in April, favoured what it described as a “new, simple standard drawdown pension”. Some argue this could negate the need for defaults while it could also be argued that a prescriptive centralised approach could also stifle innovation.
The report said: “Government should allow Nest to provide decumulation products from April 2019, including a new default drawdown pathway.
“Every pension provider offering drawdown must, by April 2019, offer a default decumulation pathway suitable for their core customer group, subject to oversight by existing Independent Governance Committees and subject to the same 0.75 per cent charge cap already in place for accumulation in automatic enrolment.”
The Committee’s recommen- dations are not law however. The FCA suggestions meanwhile are arguably a little less interventionist. It has published the final report of the retirement outcomes review following two years of work and is now conducting a consultation about follow up rules and guidance.
That report says: “ Our evidence suggests that a more structured set of options would help consumers engage with their investment decision, consider their retirement objectives, and match their drawdown solution to these. So we think that providers should offer three ready-made drawdown investment solutions (‘investment pathways’) within a simple choice architecture.”
It has also set out three scenarios for customers – I want my money to provide an income in retirement; I want to take all my money over a short period of time; and I want to keep my money.
The FCA’s report is underpinned by some pretty alarming statistics. Most concerning is that fact that 60 per cent of consumers not taking advice were not sure or only had a broad idea of where their money was invested while 33 per cent of non-advised drawdown consumers are wholly holding cash. The report adds: “For some providers holding money in cash has been the default arrangement if a consumer does not make an alternative choice, and many consumers are not aware that their money is held in cash.”
The pensions industry has given these suggestions a rather mixed review.
Aegon public affairs director Steven Cameron says: ““A single default decumulation pathway as proposed by the Work and Pensions Committee would have completely killed the concept of pension freedoms by pushing people into a default product, fund and level of income. The FCA is focussing much more narrowly on the investment choice once an individual has chosen drawdown so is far less conflicting. But even with three investment pathways, and I suspect that will grow to five, customers mustn’t be lulled into thinking they’re getting a personalised, ideal solution.”
“There’s a potential conflict between what the FCA is proposing to allow as defaults in non-advised drawdown and its wider distinction between when guidance crosses into advice. We need to step back and identify what guidance adviser firms can offer customers who won’t seek full advice.”
Some believe that policymakers have overlooked the amount of innovation that is already occurring in the market in terms of delivering guidance and advice and indeed developing default solutions – albeit outside the FCA’s regulatory perimeter.
For example, Smart Pension and Legal & General are partnering to launch a retirement solution which will be divided into four pots: drawdown, annuity, a ‘rainy day’ pot of liquid savings, and an amount kept back for leaving an inheritance
Smart Pension director of business development Paul Budgen says: “When we were designing our Smart Retirement Account with Legal & General, which is set to launch next year, we put the customer at the heart of the product. Our technology will enable us to use behavioural economics to engage with our members and offer both flexibility and security.”
But while Smart welcomes the report, others are more sceptical and have concerns that advice has been given a lower priority, just when it is most needed. LEBC director of public policy Kay Ingram says: “I am very disappointed that the wake up pack will no longer have to signpost people to advice.” “What we would like to see is more support for advice. With our bionic service we are trying to cut the costs of advice and are also providing a lot of guidance sessions, provided through the employer. We feel that is the way forward, not to focus on KFIs and asking providers to be in favour of nudges and information. It is disappointing to see advice sidelined suggesting that it is too expensive but that is very defeatist. We are trying to use technology to get the costs down. We would never say advice compulsory but it should be encouraged.”
Yet she is also concerned that the FCA has been somewhat put off by its recent research on robo- advice which found problems with, amongst other things, suitability. “The recent robo-review has coloured the FCA’s views on this. We need to get them to understand there are hybrid models – not just face-to-face or a robo saying ‘just tick these boxes’.”
Guidance and financial education provider Wealth at Work director Jonathan Watts- Lay believes that the regulator has fallen into the trap of becoming too product focused.
“We’re becoming very product focused again. This is almost back to where we were when people were buying annuities. The pension providers will be very happy with this because they effectively keep the assets. But freedom and choice almost gets destroyed. They will say you can start drawing your income now and the average person may think ‘fine’ and not realise they could go elsewhere.”
“I know for a fact that when people get the right guidance and advice, they can end up in a far better position. If people get it right, fundamentally it puts more money in their pockets.”
He says that guidance often prompts people to go on to take advice and adds that the workplace pensions world is at last becoming more concerned with what happens after retirement.
We have seen a lot of different behaviour in the last 18 months to two years. We have received a ot of requests for proposals from trustee boards. Until two years ago we hardly received any because the trustees would deem decisions made at retirement as not their issue. It is a recent phenomenon. What boards are now doing is buying into this being a service based proposition.”
LV life advice director David Stevens says: “You can’t put in default decisions and pathways that sit perfectly with the needs of everybody. You need to tailor that to individuals. That is the role of regulated advice due to the complexity and irreversibility of the decision. We also recognise that is unrealistic to say “the answer is everyone gets advice, now what’s the question?”
to take an income, to preserve capital, perhaps to pay for care and to leave an inheritance.
He argues that meeting all these objectives simply isn’t possible, adding much of his current work concerns looking at heuristics – rules of thumb – to see what can be designed to help people. He suggests, among other things, that it might be better if they retained the tax-free cash perhaps as a rainy day fund. He says: “The problem here is that the term ‘tax free’ is a like a shining beacon saying ‘take me, take me’ so it may not be easy to achieve.” He also wants to look at encouraging people to take an annuity at a later age.
“We need to take people to the place where they will give up their pots later in their life. So you can manage different phases of interaction. An annuity is much more likely to meet their needs at that stage and will look like good value. We need to help members to do those things to get to a better outcome.”
Bird worries that pathways may only be addressing part of the problem.
“We are never looking at the complete picture. All a default pathway looks at is a single pot, not state benefits, other assets, other pension schemes which should come into the assessment. We could end up saying from a theoretical actuarial point of view
We do think things that simplify things for customers so that their decisions are better framed is helpful. If you want the best decision you need advice. Pathways will help some people find a least worst solution.”
He also agrees the market is changing significantly in terms of appetite for advice on smaller pots. “We now have a level of corporate solutions distribution we didn’t have two or three years ago. While in the past employers and trustees concentrated on choice of investment funds and administrative platform, my sense is they are looking at guidance and advice for members.”
But he adds that with so much on trustees’ plates, setting up the infrastructure may involve a lead in time of a couple of years.
LifeSight head of proposition development David Bird says that people may be looking for a little too much from drawdown, wanting that people need an income that protects their spouse and doesn’t run out. That is true overall but it’s not true of any particular pot and doesn’t really reflect actual spending patterns. Anyone who supports pathways will say we’re not making people do something. Yet it could end up looking like an annuity but being not as good, because it is not collective. That could send you down the advice road.
“Everyone should get an expert to help them but that is unrealistic – there aren’t enough advisers. Providers need to put things together that people can relate to. We are on this journey to help them articulate their objectives for this particular account and help them make the right decision.”