Before freedom and choice, the workplace pensions landscape was considerably more predictable than it is today.
Employers who offered a defined benefit arrangement would pay their employees a scheme pension on their retirement. Those offering a defined contribution arrangement could expect employees to convert that pension into an annuity.
Employers and trustees were able to feel that when it came to their employees’ retirement that their responsibility largely related to the accumulation stage.
But all that changed in April 2015. Employees on the DC side can do just about anything
they want with their pension savings, once they have paid whatever income tax is due. And while DB remains solid and stable for those that stick with it, members are increasingly becoming aware of what they could get by transferring out.
So should employers and trustees be doing more to help their employees plan for and transition into their retirement? And is the range of statements, nudges and interventions that could be construed as advice so broad that providers, advisers, employers and trustees are retreating into their shells?
Malcolm McLean, a senior consultant at Barnett Waddingham and former chief executive of the Pensions Advisory Service says: “We have an entirely different ballgame now compared to what we had prior to the freedoms coming in. The key issue then was when you started your pension plan and how you were going to accumulate a decent pension at the end of it. That’s still important, but almost as important, if not more important now is the ‘at-retirement’ stage.
“Under the old system, things were fairly automatic, you’ve got a pension or you got an annuity and you hadn’t much choice about it. Now we’ve got to make all sorts of major decisions which ultimately will determine the level of income you have throughout your retirement. Therefore, it is an absolutely critical stage and we should give people the maximum help and advice that we can.”
There are some signs of regulatory action to narrow the choices on offer. It is becoming increasingly difficult for retail financial advisers to recommend and facilitate a transfer from a DB scheme, partly due to ongoing rule changes, and partly because professional indemnity insurers are concerned about future claims.
In addition, the FCA’s investment pathways, due to take effect from next summer, will give some direction to retirees and at the very least will mitigate against keeping retirement savings in cash for a prolonged period.
McLean says: “The FCA established that many people are going into non-advised drawdown situations and just taking the tax-free cash and leaving the money, invested in cash potentially for the next 10 years. So, they ntervened in that
“The investment pathways are well intentioned, but I still think it is better for most people to get the benefit of financial advice or Pension Wise-style guidance to the maximum extent possible, and certainly, much more than previously was so.”
He says the pathways have “something to commend them” but he also sees pitfalls.
“The drawdown provider will have to be very careful they don’t get into a situation where they tip over into giving advice.
“We really have not got this sorted out, the difference between helping people, giving them information, giving them guidance or giving them advice. Many providers are quite wary about this. There are dangers this could go wrong with people saying I was pushed into this.”
Other challenges include the rising state pension age, which could undermine investment pathways in much the same way as it did for lifestyling in the past, when the shift into bonds and cash came too early.
McLean believes the whole andscape needs simplification rather than currently trying to look at every eventuality in detail, though he recognises that something needed to be done.
However, although these initiatives are clearly significant, corporate advisers and pension experts are worried there is no clear and settled view regarding what sort of help, guidance or advice employers should be providing, if they should be providing any at all. There is broader frustration at what might be best described as the current policy confusion which extends to reliefs and allowances and tax liabilities. Advisers warn against any assumption that the public can keep up with all this change.
Cavendish Ware associate director Roy McLoughlin still gets asked about having to buy annuities, because people have ‘heard their nan talking about it’, and believes the level of public knowledge of pension retirement options may be lower than we think.
He says there are too few IFAs, many of whom are targeting the top 5 per cent in terms of wealth. Meanwhile, with the commission and consultancy charging ban, incentives which saw some IFAs continue to advise many GPP clients have gone. At the same time, you have a large group of people who might well benefit from drawdown but are embarking on it without advice – a “hugely risky strategy”.
Hargreaves Lansdown head of retirement policy Tom McPhail says: “We’re not going to close the advice gap. I don’t see any immediate prospect that all of a sudden the industry is going to come up with some kind of clever tech solution that means all the millions of people coming up to retirement can access low cost advice in a way that they’ll engage with and pay for. That does not seem to be happening. We need to use guidance, information and other tools.”
“Some employers might pay for some help and it might be easier for members to access some cash from their pension costs to pay for advice. These things will chip away at the problem, but they are not going to solve the problem overall.” McLoughlin says there are other more practical challenges which policymakers can sometimes seem unaware of.
He still has to convince some clients to gather all their pensions together, because only when they see the overall amount, does the message get through about financial planning. The dashboard will help, but this could be many years away.
He says given the scale of the challenge, it will need government to seriously address what employers are providing, and argues that this will require something much more significant than the limited tax breaks designed to encourage advice.
He adds: “The Government has got to look into how to engage with employers and how to encourage them to be part of the solution perhaps with advice surgeries and pension talks. Is there a way to let them write it off against their P&L? Then employers can help advisers to be part of the solution.”
The Financial Inclusion Centre director Mick McAteer says that one of his disappointments has been the lack of development of technology in terms of delivery of advice and information.
He says that while the top end of scheme members can afford and benefit from independent financial advice, he questions whether the advice cost is worth the potential uplift in retirement income for the middle and lower parts of the market, especially when we know this involves relatively small pots. At the same time, he is disappointed that technology hasn’t provided at least some of the answers such as the once widely discussed portable fact finds.
He says: “Never mind the dashboard. We haven’t got to the stage where people can collect the basic information and then transfer that to somebody else. The cost of information gathering is a big part of the unit cost of advice.”
Others do see a technological way forward. Jargonfree Benefits founder Steve Bee says: “The best place for employees to find out this stuff is through their employer. Whether they’re actively involved or not, they still need to be the hub. I always thought the Money Advice Service in the early days should have been planted on every pension scheme’s website.
“Employers can do a load of this stuff because everyone’s got a computer in their pocket these days. You can make financial capability tools, simple ones, and even quite complicated ones available to everybody. It’s the next step for pension schemes.” Bee points out that the larger schemes have always done this sort of communication.
“But I think even the small ones could provide these tools. I think you could even put advice in as part of that package and certainly guidance.
“Are pension schemes doing it? Not many, but it is a great opportunity. It would be nice if the government began – perhaps not legislating for this – but at least saying this is the sort of thing you should be doing.”
McPhail believes regulators have looked at the situation but are uncertain what to do. He points out that the Money and Pension Service’s strategy may include retirement as one of five building blocks but does not really. He sees a lack of inspiration among regulators too.
He adds: “I don’t think regulators know what the answer is. We have a binary world of advice here and information there, and they haven’t really come up with a regulatory framework to fill this gap. They don’t know how to do it.”
He says that the RDR cleaned the business up to a large extent and the FAMR review tried to find ways to extend help and guidance to millions of people either unable or unwilling to pay for regular advice. “And so far it has failed. The whole FAMR looked at all those different tools and still couldn’t come up with anything”
However, McPhail thinks there are incremental improvements available. The FCA might improve regulatory certainty and use the Senior Managers and Certification Regime (SMCR) to challenge firms on how robust they are being in their duty of care to customers, which could help extend guidance from firms that are dealing with a large number of non-advised customers .
“I think it is now about finding a regulatory framework that enables firms to do more of the guidance stuff. There is a guidance gap not an advice gap.”
McLean emphasises his view that employers are still concerned about their employees’ retirements although partly because they want to see them retire.
He adds: “Though the age of paternalism is behind us, employers want most people to plan for their retirement and to retire at the age they want to retire and when their employer wants them to as well. Most employers are genuinely concerned to help but a lot don’t understand how far you can go. Even most of the stuff from the Pensions Regulator is in the form of warnings. We want employers to be a bit more involved. It is in everybody’s best interest if people arrive at the age they want to retire and get an income for the rest of their life – for the individual’s sake and for the employer’s sake as well.”