The FCA’s own analysis of pension freedoms problems overlooks the fact the solution must start by examining outcomes rather than products
It has gone consultation crazy in the retirement world again. Just as we have put to bed responses to the FCA’s consultations on defined benefit transfers and the interim retirement outcomes review report, the work and pensions select committee has announced an inquiry into pension freedoms.
Much of this is covering the same ground as the FCA review but the last item on the terms of reference is intriguing:
“Are the freedom and choice reforms part of a coherent retirement saving strategy? To what extent is it complimentary to or undermined by other policies?”
The FCA did not ask this question in its review but I am sure many in Canary Wharf have some pretty strong views on what the answer should be. The retirement outcomes review shines a light on the inevitable challenges that emerge when you take such a major policy from announcement to implementation in just 382 days.
Whatever you think of the pension freedoms – and I am a fan – they have turned retirement saving on its head and the regulator has the unenviable task of working out how it needs to adapt its rules to ensure consumers are making the right choices.
The FCA’s analysis of the problems as set out in its interim report is sound but the solution needs to start by looking at outcomes rather than products. Trying to adapt product rules alone will simply add to the complexity of the retirement market for consumers and to the risks for advisers and providers.
Today’s rules result in an inconsistent treatment of retirement choices with the consequence that we are putting significant barriers in the way of lower risk decisions while letting some high risk decisions be made without any meaningful intervention.
For example, we insist on advice for a £30,000 DB transfer, yet allow people to cash out huge defined contribution pots without even taking guidance. Similarly, those taking tax-free cash through drawdown are deemed to have made a risky decision but it seems taking an uncrystallised funds pension lump sum cash withdrawal is okay. Given the tax impact and triggering of the money purchase annual allowance the UFPLS results in I would say the UFPLS was the much riskier option.
Our approach needs to be less product led and more outcome led. Want to take cash? Here is why that may or may not be a good thing, here is the ways you can do that and here are the pros and cons of each. Need income? Here is what you need to think about (sustainability, flexibility etc) and here are the products you can use and the features and risks of each.
Taking tax-free cash and creating sustainable flexible income both use drawdown but the product risks are very different. Currently, each customer is treated in the same way under product disclosure rules even though most taking tax-free cash will carry on saving as before.
It feels more appropriate that we tailor the product disclosures to what the product is being used for. This certainly seems a more proportionate response than the idea of uncoupling tax-free cash from pension saving proposed in the report.
A big obstacle to taking this outcome led approach is that many people have already decided on the outcome and want to focus on how they achieve it.
While the policy of freedom and choice was welcome, the political positioning of it was less helpful. When ex-chancellor George Osborne said “no one will have to buy an annuity” he did not mean no one should – but that seems the way many have interpreted it. When he said people should be able to use pension pots like bank accounts, there was not any suggestion this might not be a good idea for a great many people.
What this comes down to is that, in giving people freedom, we have not reminded them of the responsibility that comes with it. Without people having a better understanding of the consequences of their actions we cannot hope they will make the right choices, and the FCA and providers will be left trying to pick up the pieces.
So we return once again to the real challenge at the heart of this: how do we encourage more people to seek expert help? This will at least be guidance but should really be advice for most people. There are growing calls for some form of default guidance, perhaps the midlife MOT mooted by John Cridland in his state pension age review.
I am not sure how far we can compel people into getting help but having them understand the importance of the choices they are being asked to make might lead more to seek out advice and make the regulator’s job a whole lot easier.
Richard Parkin is head of pensions policy at Fidelity International