Crystal ball gazing is not recommended. Best left to astrologists and their followers. But a reader asked me a question recently which caught me short: what happens from a regulatory perspective when hundreds of thousands of people with little or no investment experience start retiring each year on defined contribution-only pensions and move into drawdown?
One answer is nothing. Pension freedom means exactly that: liberty to do what one wishes with one’s own money. Minister after minister told the electorate in 2014 and 2015 “it is your money to do with as you please”. If we have a long period of strong investment returns and low levels of volatility, then the status quo could hold.
But there are two reasons to suspect that change is coming, even if returns are good.
The first is that the FCA has already indicated its anxieties about the decumulation world post-pension freedoms. In particular, the extent to which individuals with no historical experience of investing are passing into drawdown (the passive tense is deliberate) without any conception of the risks and rewards involved.
A recent survey found at least one third of those entering drawdown now had little or no investment experience. The FCA calls this “zero income drawdown” in that drawdown for this group is simply viewed as a kind of bank account, attractive because it facilitates taking tax free cash in flexible slugs.
Or, as I say, pension freedoms are encouraging savers to become investors by the back door without any measuring of their risk appetite. In this context, the second reason to expect regulatory movement – the advice gap – becomes imperative.
The Financial Advice Market Review is best viewed as a dress rehearsal for the real thing. While we remain in the midst of income drawdown’s phoney war – so long as the vast majority of pounds in drawdown belongs to individuals with defined benefit pensions in payment and lots of other wealth assets, too – urgency in closing the advice gap is muted.
When the skirmishes end, however, and the field is dominated by hundreds of thousands of DC-only retirees who have spent their whole working lives in the default pension investment fund and in cash more widely, things change.
The question is, what kind of change? This depends on whether the government doubles down on pension freedoms or not. If it determines advice must be given to these new retirees, the definition of guidance will be expanded until it enables a recommendation of some kind, with advisers paid directly by the government to deliver this service using technology to keep the cost down.
Or the banks will be green-lighted by the government to re-enter the advice market completely.
On the other hand, if the government decides pension freedoms take rights too far at the expense of responsibilities, then it is likely policy would return to the position it sat between 2014 and 2015 – namely, individuals would need a guaranteed income of circa £20,000, with liberty to do with the rest as they wished.
Predicting the future is for astrologists. But revolutions play out over decades, not days, and pension freedoms are revolutionary.
Gregg McClymont is head of retirement at Aberdeen Asset Management