One way of looking at politicians is as businessmen. They understand people’s wants and desires, identify a potential ‘market’ of voters and pitch a product.
The ‘Freedom and Choice’ change to DC pension taxation was just such a product. Chancellor George Osborne identified a group of ‘customers’ for the policy – DC savers resentful of the constraints around their fund – and gave them the flexibility they wanted.
Recent research from the Pensions and Lifetime Association Savings Association – entitled “Pension Freedoms: No more normal” – provides a fascinating insight into people who have already made use of the pension freedoms since April 2015, comparing them to those who haven’t.
“The actioners”, as the PLSA labels them, were more likely to have diversified pension provision and investments and higher incomes, were more likely to have second homes and displayed higher levels of financial confidence.
We could also surmise they are more likely to be Conservative voters, and more likely to respond to messages from the Government around “it’s your money” and “people should be trusted with their savings”.
The crucial point is that once this group have extracted their DC savings, they are effectively ‘satisfied customers’ of the Chancellor’s pension revolution, who then exit the market.
The groups remaining – the “investigators” and the “inactive” as the PLSA label them – present politicians with a different market for their policies. Their customer characteristics are different, as the PLSA makes clear. They have lower financial confidence, lower incomes and less financial wealth.
It follows that the policy ‘products’ they will want and the messages they respond to will also be different.
Thinking about the pension freedoms in this way provides some insight into how the politics of Freedom and Choice will evolve.
There is growing support and interest in the principle that DC pension scheme providers should have in place clear default ‘pathways of least resistance’ for mid-market savers that balance flexible access to some cash with provision of a value-for-money income, and some protection from longevity risk.
Nest, the PLSA, the TUC, Labour’s shadow pensions ministers, as well as a host of think tanks, academics and pension policy grandees have all now touted this approach, which is also the focus of pension policymakers in Australia and South Africa.
For a typical “actioner”, default decumulation models would probably be an unwelcome, patronising distraction.
But for the remaining DC customers in the pension policy market, especially those who were defaulted into pension saving through auto-enrolment, it probably looks like just the ticket. Indeed, it was through researching what their members wanted that Nest came up with its ‘retirement income blueprint’, based on a default approach.
So here’s a prediction: within two years, the Chancellor and the Work and Pensions Secretary will be talking about guaranteeing all DC savers access to a good-value, secure, flexible income as a default.
Why? Because that’s what their customers want.
James Lloyd is director at the Strategic Society Centre