Freedom failure: Has Osborne’s pension revolution lost its way?


The unresolved issue of insistent clients, providers frustrated by technical problems and a lack of customer data means the Government’s pension revolution has not been covered in glory.

The first anniversary of the launch of George Osborne’s ground-breaking liberalisation of the pension systems finds the industry grappling with more questions than answers.

New figures show the peak of savers accessing their pots under the new rules may have passed, but it will be decades before the long-term consequences are revealed.

Not only will future generations of savers have a different attitude to their pension, but there is currently nothing in place to track what happens to cash once it is withdrawn.

At the same time, Money Marketing research shows the number of enquiries received by the Financial Ombudsman Service relating to pension freedoms is increasing, with advice a major factor.

The pension freedoms themselves have lit the touch paper on a whole new raft of reforms.

The Financial Advice Market Review could see advisers hit with yet more drastic changes as the Government scrambles to boost access and aims to extend the freedoms to existing annuity holders.

So 12 months on, how have savers reacted to the freedoms? What are the outstanding issues damaging the success of the reforms? And what should the Government be doing to keep the revolution on track?

“Heavy machinery”

After a huge increase in activity in April 2015, the pensions market has seen the number of people accessing their savings subsiding.

FCA data shows around 220,000 pots were accessed for the first time in the three months following the launch of the freedoms, but this has fallen to around 125,000 between October and December.

“We are handing over very complicated decisions to people who are not equipped to make them”

Standard Life says around one in 10 of its eligible customers have taken action, with only one in 25 fully cashing in their pension.

Providers say the evidence suggests fears people would cash in their pension and blow the lot are unfounded, noting the high proportion who have decided to do nothing.

Royal London group chief executive Phil Loney says: “No one was really sure how consumers were going to use the freedoms. There was a lot of pent-up demand in the first few months and we were worried whether this would continue. I was concerned after the first two months we might have opened up Pandora’s box.”

He adds: “Now we have more data the evidence shows the great British public are by and large using the freedoms pretty sensibly. Yes, we see people cashing in very small pension pots but that’s just trivial commutation.”

But others warn the figures taken on their own mask the truth.


Association of British Insurers retirement policy manager Rob Yuille says: “We don’t know how those withdrawals fit into peoples’ wider financial circumstances. Our data and the FCA’s looks at pots rather than people so we don’t know what else those people withdrawing are relying on – whether they’ve got defined benefit schemes, if they are homeowners, in debt or accessing means-tested benefits, for example. It will probably take years to work through the full implications of the policy.”

Specialist annuity providers were hardest hit by the changes. Rivals Partnership and Just Retirement completed their merger this week and outgoing Partnership chief executive Steve Groves says the Government is playing a dangerous game.

He says: “My position as it was on the day of freedoms remains the same. We’re handing over very complicated decisions to people who are not equipped to make them. You can’t say the freedoms are a bad thing in the same way you can’t say heavy agricultural machinery is a bad thing.

“But you tend not to let people operate heavy machinery without the knowledge and training to do it. I worry the freedoms are doing something rather similar and we’re going to see a number of pensions who have cut off their proverbial legs in later life.”


Groves adds for “the majority of people” the freedoms are not working well. He points to the fact many people cashing in are years away from retirement, while others are doing nothing at all.

He says: “There are people drawing down too quickly and in the volatile and falling market we have seen since the freedoms that is not good news. There is also a group of people who say they have not touched their pensions because they are scared and that’s also bad news. In that situation you need strong guidance with a high uptake but there is an advice gap and the guidance is not filling it.”

Mounting complaints and market failures

A year on, a Money Marketing Freedom of Information request reveals many of the problems customers faced accessing the reforms in the early weeks have not gone away.

Between June 2015 and January 2016 the Financial Ombudsman Service received 106 enquiries a month due to the freedoms, up from 77 a month in the first three months of the reforms.

Of those that advanced to formal FOS complaints, a quarter relate to delays, 24 per cent were about administration and access being blocked, while 19 per cent focused on the requirement to take advice.


The regulator and the Government have moved to address some of these stumbling blocks and have launched multiple consultations as a result, including the FAMR which aims to clarify the boundaries of advice, as well as helping providers value guaranteed annuity rates.

But Pensions Institute director David Blake says three “market failures” are “impeding the success of the freedoms”.

He says: “The first is the absence of a deferred annuity market. If you want to make this work, you need flexibility, investment performance beating inflation and longevity insurance coming in to tackle extreme mortality.

“The second is we were under the belief there would be a range of institutional solutions coming along, either in the form of scheme drawdown or group annuitisation. We were told there would be innovation but there hasn’t been. People have been left to the retail market, which means high charges and Sipps.

“The third market failure is advice. There’s nothing between full advice and guidance and no safe harbour products. There could be products designed with decision trees but you would have people offering this being able to say this is advisory, not advice.”

Protecting from self-harm

Dealing with clients going against advice remains a thorn in the Government’s side, despite regulatory guidance. Savers must take advice if they have a DB pension or a plan with a guaranteed annuity rate worth over £30,000.

In a Money Marketing poll this week, insistent clients emerged as one of the major problems holding back pension freedoms, with 27 per cent of the vote.

The FAMR has acknowledged the problem and pledged to assess how well professional indemnity insurance is serving the advice market.

But Personal Finance Society chief executive Keith Richards says: “Demand for professional advice continues to grow, with advisers across the country reporting they have never been busier.

“Insistent clients remain a challenge for the advice profession, however, and both the Government and  regulators have not done enough to protect consumers from self-harm or understood the challenge created for advisers.”


Pension experts are also calling on the Government to make a series of technical changes to boost the efficiency of the market.

AJ Bell technical resources manager Gareth James says customers could be given more flexibility if rules around drawdown were relaxed.

He says: “Merging drawdown is currently only possible after the age of 75. The argument against allowing this in relation to capped drawdown is people could manipulate the maximum income limits to receive more than one amount of maximum income in a pension year, but people taking more than a notional maximum isn’t as much of an issue for the Government as it was pre-freedoms.”

He adds the Government should also scrap the restrictions of the transfer part of a drawdown account.

Talbot & Muir head of pensions technical Claire Trott says action should be taken to help people in scheme pensions benefit from the flexibilities. Currently people in these arrangements, originally designed to boost income, cannot transfer into a drawdown plan.

She says: “This means when the second-hand annuity market is available, it will mean these members’ only route to access their funds in full will be to buy an annuity and sell it. Changing the legislation would mean those locked into these type of pension would be free to access the new options in drawdown.”