The arrival of the FCA’s retirement outcomes review has seen industry voices focus on the absence of people blowing their pensions on Lamborghinis and the presence of a “drift to cash”.
But is anyone surprised by either of these findings? There was never any reason to believe people would blow their savings overnight on luxuries, and there was every reason to believe the outcome of pensions freedoms in the short-term would be even more cash sitting in low interest bank accounts. As I have argued previously, the UK is a nation of savers rather than investors.
So it has proved. One million pots have been accessed to the tune of £11bn, although some will be multiple pots accessed by the same individual. Just over half these pots have been fully cashed in, but more than half of this money has not been spent but either saved or invested.
Yet the amount invested is perhaps misleading since it includes investment in property as well as investment in stocks, bonds and funds. So far, there is little evidence of large numbers of people becoming investors.
The FCA notes much of the increase in drawdown reflects a desire to simply access their tax-free cash on a flexible basis. This is a phenomenon it calls “zero income drawdown” – non-advised, delivered by the existing pensions provider, and viewed by the customer as a kind of bank account. On the realities of staying invested and its rewards and risks, there is no evidence of customer engagement or understanding. If ever there was a case for advice, this is it.
Beyond the statistics, two aspects of the FCA’s approach caught my attention.
The first is the lack of international comparison. In the footnotes of its paper, the FCA cites conversations with regulators in Australia, the US, New Zealand, Denmark and Ireland.
But only Australia is mentioned in the body of work, with positive noises made about the proposal that pension schemes (known as “supers”) default members at retirement into hybrid products which combine income drawdown and deferred annuities.
At this stage, though, it is just a proposal. Nowhere across the world is there an example of people choosing freely to buy products at retirement which contain guarantees. Perhaps this is why the fruits of the FCA’s discussions with these national regulators go undiscussed. There are simply no lessons to be learned from the US, New Zealand and Ireland learned regarding good decumulation practice, while in Denmark the lesson is annuitisation works.
Ireland’s drawdown market is characterised by stiff charges and limited shopping around. Meanwhile New Zealand has an excellently performing system overall but this is largely because of its extremely generous universal state pension pegged at two-thirds of average earnings. Just imagine if the UK offered a £19,000 pension per year to everyone. Decumulation is characterised by taking one’s pension as cash to buy a property.
In the US, the fiduciary rule signed by Barack Obama but now under threat from President Trump is an attempt to reduce the conflicts of interest which exist in the US retirement market. Unlike in the UK, regulated advice does not involve a duty to place the consumer’s interest first.
The FCA also argues the number of people cashing in their pensions reflects mistrust of pensions, as well as the trivial size of many pots, and an understandable inability to discount the present value of their future individual cashflows.
But the reasons cited by consumers in the qualitative and quantitative surveys on why they cashed in their pots, such as “I’ve never believed in pensions”, “It will disappear if I don’t cash it in” and “I wanted to control it myself” point to the conclusion that people simply dislike pensions.
Dislike and mistrust are not quite the same thing. Mistrust assumes the product could be popular if only trust could be restored. But looking around the world, the evidence suggests given the chance to choose freely people do not to lock up their money in a pension.
This evidence is in line with a growing body of academic behavioural literature. Across the board in a series of experiments people choose individual control over devolving responsibility to someone else, even where the individual is aware that the outcome is sub-optimal.
It seems a psychological satisfaction is gained which outweighs the financial cost. In the pensions space, all this suggests unless forced to do so, people simply will not buy retirement products containing guarantees en masse. After all, “taking back control” as we know from the Brexit rhetoric, is a powerful motive force.
Gregg McClymont is head of retirement at Aberdeen Asset Management