With the freedom and choice reforms coming into force in just a few weeks, industry attitudes and opinions range from bleak pessimism to enthusiastic optimism, while many employers demonstrate stark indifference. So who will be proven right, the happy free-marketeers or the doom-peddling paternalists?
JargonFree Benefits chief executive Steve Bee is definitely in the optimists’ camp. He says the reforms, combined with the state pension changes, amount to a revolution – the sort of Christmas present he would have liked two decades ago. He also believes the reforms were inevitable.
He says: “This surprised everybody, yet it is the logical conclusion since the Pensions Act 2007 was passed, when they announced we would have a single-tier state pension in future.
“It is finally going to give us what William Beveridge tried to give us in 1942. We will have a subsistence-level pension, no means-testing, and therefore no devaluation of private savings. It gives a bedrock for private savings.”
Bee continues: “I was saying back in 2006 that once we had got a single-tier pension, once we had driven means-testing out of the system, we would question whether the pension tax laws were good enough for people’s needs. Once you can’t fall back on the state, the state has no right to tell people how to spend their own money.
“I can’t believe it, but we have got to an enlightened, sensible position.
“I never thought I would hear a Chancellor of the Exchequer describe people’s pension savings as their own money, not to have any more saving through the unfunded state second pension, and a serious push for every employee to have funded pension assets accruing at work.”
Bee adds, however, that a lot of the thinking on pensions saving has yet to catch up with the magnitude of the reforms.
He says: “The demand will be enormous. We sit at conferences and listen to people drone on about £2tn in funded assets. We won’t have £2tn – which is a fortune – in deferred income. It is going to come back into the system while people are still on the planet and it is under their complete control.”
Bee says the next development will be to move away from the assumption that workplace saving has to be for retirement.
“You shouldn’t have to say what you are saving for. We don’t want to have this silo approach. Putting money aside for decades means someone has to check that you mean to do it,” he says.
Aviva head of policy John Lawson thinks some elements of the new service will be decided by regulation.
“What are they going to require providers to do?” he asks.
“How will they regard uncrystallised funds pension lump sums and drawdown? Can that go through execution-only? We have shifting sands.
“Most providers would have been able to facilitate an execution-only journey for people taking some cash out or taking the tax-free lump sum, but there is also a question of whether we can support them in this through a service we offer.
Other experts are also scathing. PTL managing director Richard Butcher says: “The second line of defence sounds a bit like Captain Mainwaring’s platoon.”
Lawson adds: “In the old world, where people bought annuities or perhaps moved their fund elsewhere for drawdown, it might have been clear enough. Now it may mean we direct people to advice for some options and execution-only for others. Yet if too much of this has to go to advice, there will be a lack of capacity.”
But what will retirees want? Aon Hewitt partner and head of DC consulting Sophia Singleton says employers are increasingly seeking answers to that question.
She says: “The extra freedom and flexibility being offered to employees has really put engagement up the agenda, focusing on the run-up to retirement. There is also a move to greater understanding of their employee base and scheme membership, so segmentation is becoming more important too.”
The consultancy has surveyed 2,000 DC scheme members with Cass Business School and YouGov. Singleton says many employees are looking to their employer for answers, with around 40 per cent expecting drawdown to be facilitated by their scheme in some way.
She says: “The changes, combined with what members are looking for, require more governance, and many employers are looking for some way to outsource that.”
Singleton adds that the research shows members fitting into roughly five categories: about 10 per cent want to take their savings as a lump sum at date of retirement; around 15 per cent want the flexibility to dip in and out of their pension savings, so they are in a drawdown category; another 5 per cent want to leave the money invested for long-term care or bequests – “probably people who have got a DB core or other savings”; and the remaining 70 per cent want a steady income but one split 50/50 into income drawdown and annuities.
Singleton notes that this makes around 50 per cent of members who will want drawdown, yet 98 per cent of employers are not intending to provide it. She says: “Employers want members to come up with a sensible solution in a sensible way, so they are looking at identifying a preferred drawdown provider.”
She adds that the research shows that about a quarter of members would seek out an IFA for advice. Around a third would decide for themselves or seek help from family or friends, while 25 per cent would consult a pension provider.
Singleton says: “The group I worry about most is the ones who do it themselves or ask their family and friends. They are essentially relying on guidance but it is not going to do what they want it to do. That is the group employers will be looking to help more.”
She adds that some employers are also funding DB/DC transfer advice. “That expenditure can have a good return, in the sense of a benefit for employers because of the risk management, reducing the risks in the scheme. IFA advice around DB-to-DC transfers is economic and affordable for them.”
Singleton says many employer clients view the freedoms as a positive development, agreeing with Steve Bee that the reforms may shift thinking.
She says: “A lot of my clients are looking at it as a way of promoting savings to members. We are getting people who see the value of the scheme and are engaging with it. Workplace management is a concern but for some schemes it is not an immediate issue as a lot of people have a DB core.”
The Pensions Advisory Service chief executive Michelle Cracknell believes there will be more pressure on retirement decisions by 2020 when people are relying solely on DC. People retiring today typically have some DB underpin.
As a result, she expects a lot of calls in April and May on housekeeping – tidying up little pots such as accessing a spouse’s stakeholder pension, which may have been taken out for tax planning purposes.
Capita’s Geraldine Brassett, who is also a board member of the Pensions Administration Standards Association, anticipates a big workload increase for scheme admin.
She says: “What worries me is we don’t know how people are going to respond. I tend to divide them in three: the people who were halfway through the retirement process and came back to stop us, these ‘unpickers’ will come to us again in April; there will be deferrers, who probably would have taken their benefits but have chosen not to until April; and there will be people who have ignored it.
“The challenge in trust-based schemes is also that there is already massive demand on resources, including the ending of opting out.”
Brassett adds: “Yet I am also concerned that if we oversimplify, people will take their guidance, and there is a fair chance they will come back to us.”
She thinks issues such as employees seeking lost benefits from old schemes will also increase workloads, and wants to see standardisation.
“The more we can standardise the information we give people for their guidance session the better, and then they can get a better service. We don’t want them to end up disillusioned with pensions.”
Another area still undecided is the de-risking strategy running up to point of retirement. Hargreaves Lansdown head of pension research Tom McPhail says: “You could start to get clever and say ‘Let’s focus the de-risking strategy on pot size.’
“You could do it in terms of category of employment, a strategy for this group of people, another for another group. Maybe, over time, we can build in experience in terms of
what people do with their pots of money and feed that back into the de-risking strategies before retirement.
“We don’t have that experience now, though, because the rules have changed.”
He adds: “There is a lot of discussion around guided pathways. Maybe we could simplify these choices but you need to have a conversation with them to do that. In fact, in some cases, you can’t pay them without having a conversation. They were auto-enrolled; you don’t even have their bank details. We have to have that conversation, even if it is only ‘Where would you like us to send the money?’
“Maybe once we start having that conversation, we could say ‘How would you like us to send you the money? Instalments? What about tax?’ But really we wanted to have the conversation 10 years ago.”
The reforms face one other problem – a potential level of indifference from employers, although this may be more prevalent among SMEs.
Jelf head of benefits strategy Steve Herbert says: “It is low down their list and employees aren’t asking them to be interested. We have to tell them to do something but it is behind auto-enrolment, the price cap, new governance regulations in their priorities. It is not on their radar.
“Abolition of the default retirement age happened three years ago. Surveying 250-odd employers recently, 87 per cent had compliance failings and that was something they had to do. Freedom and choice is something they don’t have to do.
“The SME community sees it asthe provider or adviser’s job, although it means there is an opportunity for the industry.”
Premier Pensions Management director Ian Gutteridge says his client base is more engaged. “In the larger market, where you have 1,000 employees and 50 of them are going to be retiring in any one year, it involves the HR director.
“It is about the brand and reputation of the employer; they can’t get away from it. It is all over the press. We are finding that firms are putting their head over the parapet and asking what they are going to do, though driven from the HR function and not the pension department,” he says.
Butcher says, from his experience of sitting on six independent governance committees and 15 master trusts, the picture is very mixed in terms of what trustees and employers are doing. He has asked 160 DB service providers for evidence of any big uptick in DB-to-DC transfers but says they have not observed it so it may turn out to be an area that does not see much activity.
But Butcher has a warning for other employers. He says: “We can no longer compel people to retire and, after April, people may take their pension money, to buy a Lamborghini or a buy-to-let property, or just to have a few drinks. It has decoupled the employer from an important feature of pensions – the ability to manage exits. Employers have previously used the pension scheme to get people out of the business when they were no longer economically productive.
“They need to look beyond the risks they are used to.”