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Nic Cicutti: Hargreaves doth protest too much on drawdown cap

The company’s response to Which?’s call for a drawdown charge cap was immediate, and overly harsh

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Does Hargreaves Lansdown head of pensions research Tom McPhail have it in for Which? over income drawdown? And if so, why? I am moved to ask both questions after reading his response to a report from the consumer body calling for a cap on drawdown products.

The call for a cap from Which? last week was backed by research in which it claimed there were huge differences in charges between companies offering drawdown products. 

Which? found several high-charging drawdown products, including one that charged 2.75 per cent. Compared with a product capped at 0.5 per cent, this means someone with a typical pension pot of £36,000 and drawing down £2,000 a year would be worse off to the tune of £10,300.

A more realistic 0.75 per cent cap would give them about £8,800 more over the course of their retirement.

Which? also called for the Government-backed provision of a “backstop” drawdown provider where so-called “disengaged” consumers who wanted to take money out of their pensions could be defaulted into.

Tom’s response to the call for reforms of the drawdown market was immediate: on the charges issue, he argued any call for a cap was premature. He made the point that his own company, among others, has hugely reduced its fees in this area.

Only last month, Hargreaves announced that from 6 April it will not charge new or existing customers for set-up, one-off or regular payments, or for changes to payments. This compares with previous charges of £295 plus VAT to set up a flexible drawdown scheme and £30 for each one-off payment.

Other firms to have cut their drawdown costs include Standard Life, one of the targets for Which?’s campaigning ire, as well as Old Mutual Wealth. Companies like Fidelity Personal Investing do not charge for these services, while Barclays Stockbrokers charges £75 plus VAT.

Tom’s conclusion was: “A charge cap threatens to strangle this new pensions market before it is even born, by stifling the investment and innovation it badly needs to deliver good outcomes for savers.”

But he reserved his greatest ire for the call from Which? for a default withdrawal provider. This, he claimed, was a “recipe for disaster”, adding: “Disengaged investors should probably either buy an annuity or take financial advice, or possibly both. Defaulting them into drawdown plans when they don’t understand the risks look like a recipe for disaster.”

On the face of it, this seems quite harsh, given that Which?’s report states such a backstop should only be used in extreme cases: “Should consumers not engage with their retirement decision, or should the market fail to provide real choice and good value, the Government should assess whether it should default consumers who don’t make an active choice to this provider.” 

Moreover, the key point Which? is making is, post-6 April, many consumers will find themselves in situations where the “default” drawdown option will actually come from their existing pension scheme provider, who will charge what it wants.

Meanwhile, pensions minister Steve Webb remains remarkably blasé about the potential effects of his reforms. In a recent interview with The Observer, he said: “If you take your pot of, say, £30,000, and you do spend it over 10 years, have you run out early or have you exercised precisely the freedom we wanted you to exercise?

“You enjoyed it and then intend to live on your state pension and, perhaps, other savings. Is that the wrong outcome?”

Well, yes it might be, if being stuck on the state pension for the next 20 years afterwards was an unthought-through consequence of a decision reached with only a limited amount of information provided by the poorly-named Pension Wise guidance service.

No wonder Which? was last week joined by Labour leader Ed Miliband who promised a drawdown charge cap if his party wins the coming general election.

Hargreaves Lansdown knows genuine financial advice will not be available to the vast majority who will gravitate towards a drawdown option after 6 April. It also knows most retirees will probably stick with their provider for lack of better ideas on what to do with their pot of money.

So why is he so critical of Which? for saying so? A clue can be found in Hargreaves’ own research, which suggests between 200,000 and 400,000 people are waiting for 6 April, when an estimated £5bn could be withdrawn from pension savings into annuities, drawdown and ad-hoc cash withdrawals.

In other words, a wall of money, much of which may well stick with existing pension providers. But a large chunk will find its way to Hargreaves’ now-cheaper, advice-free scheme.

No wonder that in the days after Hargreaves announced its drawdown charges cut and the rationale for it, the price of its shares rose sharply and have carried on rising ever since, closing at 1,070p last Friday, up more than 10 per cent in the past three weeks alone.

Yes, there may be practical difficulties over calls for a backstop drawdown provider in particular. But Tom McPhail’s response suggests to me that his concern is as much about protecting his own company’s new drawdown proposition as it is about the solutions Which? is proposing to a crisis he knows is waiting in the wings.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk

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Comments

There are 13 comments at the moment, we would love to hear your opinion too.

  1. Nic does the research differentiate between personal pension drawdown and full SIPP drawdown?

    If not it is worthless.

  2. Like all arguments focused to one area alone (in this case, costs) it never, and never will give the end user a balanced appraisal.

    If we read and take into account this research by Which (cost) in all our daily lives we would all shop at poundland (other discount stores are available) !!

    As for the charge cap that’s just nonsense (IMHO) its like saying all 3 bed semi’s should be capped at (say) £225,000 based on the known cost of building materials and labour !

  3. I still find it difficult to believe that, reportedly, Which? and one other, unnamed, non-financial organisation were the only two sources consulted by the government prior to the bombshell of pension changes in the budget last year. Even harder to believe that no-one in the financial world – for whom these changes would have the greatest, initial impact – was consulted. Hardly surprising then that Which? is voicing it’s views; they probably know what is already round the corner.

  4. SOME focus on cost is important, of course it is. But it is dangerous to ONLY focus on cost.

    You can have a tracker on a low cost platform for less than 0.5% p.a. but is that suitable? Some people prefer the comfort of a bespoke managed multi asset strategy where the overall costs are gonging to heading towards 3% p.a. Some clients may want or NEED a underpinned guarantee on their drawdown plan, the cost of the guarantee will look expensive but the value for the client may be priceless.

    I do agree that direct targeting customers with high fee, inappropriate products is wrong, but so is tarring everyone with the same brush.

    Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly and applying the wrong remedies.

  5. Cheap as chips drawdown with potentially the same effect on your (W)health.
    If cheap is the right answer why don’t I see more Dacia’s on the road and why is Mercedes still in business?

    Where I do agree is where people do not take the opportunity to shop around and just buy what their existing company offer, as Nic says they can just charge what they want. It does not seem to matter how bold companies tell their customers to shop around they still do not do it, from the clients I see there seem to be several reasons.

    They trust their existing company to treat them right, and we all know how that ends up.
    They do not realise just how much better off they can be by making a little effort.
    They feel it will be expensive.
    Lastly, they do not understand the maths!

    Perhaps there should be a charge cap if the client just buys what the holding company offers without taking advice. make it low and potentially unprofitable at say 0.25% pa, then see how much insurers encourage clients to take advice

    How the industry gets round that has been debated many times and I have no intention of adding to it, but to give two brief examples of clients lack of understanding, and maybe me not selling our services well enough.

    A non-client who knows me from the shop next door asks me to calculate 1.74% of £142,000 as they cannot do it and don’t understand how to get their calculator to do it. This from a well educated lady in her 50’s.

    At the end of each year as part of the service offered we send clients an investment statement about their platform investment, where there is money outside the Isa we recommend considering moving some to Isa status or topping up if they have the money elsewhere. We do this at no cost as part of ongoing service. One client rings me today and says thank you very much I want to add £15,000 new money, but if I do that you will charge me, can I do it direct and not pay?

    So here’s a (probably ex client) who wants to add to a fund he already has which we recommended in the first place, who is happy with average 7.07% growth pa, who would not be considering additional investment unless he had been reminded, then wants it for nothing.

  6. Once more Nic I think you are being a little unfair and Which? is being stupid as usual.

    Until we are told otherwise we live in a capitalist economy. As Which? pointed out there are large discrepancies in charges – that’s exactly as it should be. This is market forces at work. If the pension holder is too lazy or too stupid to shop around that surely is their lookout.

    There isn’t a lot of difference between a VW Golf and an Audi A3 – except price, but both sell and the buyer is fully aware of the costs. In the case of Drawdown it should only be a case of proper disclosure. The high charging firms will soon lose business.

    Tom isn’t entirely wrong. Firms have to make a profit and an arbitrary cap will probably just drive many out of the market – then what will we have – another product dreamt up by bureaucrats that runs into the sand. Remember Stakeholder?

  7. @ Harry Katz: why do so many people buy their own pension providers’ annuities? Is that because “we live in a capitalist economy” and “that’s how market forces work”?

    Should nothing be done about it for the above reasons? Do we need a much stricter enforcement of OMO? If so, why not stricter controls over drawdown? Or is there one rule for annuities and another for drawdown products?

    I’m all ears…

  8. Nic

    Basically the truthful answer to your question has three parts:

    1. Either they are stupid
    2. Or lazy
    2. Or too stupid, lazy or tight to go to an IFA.

    I think you may agree that one of the biggest problems is public engagement and education. There are in fact plenty of people who are reasonably capable of arranging some, if not all, of their own financial affairs, but in this case the system mitigates against them.

    Yes of course there should be tighter enforcement of an OMO. The way that works now is not a free market. But then there will no doubt be complaints that if it were compulsory it would still not be a free market because people would have to go to and pay those nasty advisers.

    However I do have considerable sympathy. As you know I have just sold my firm and have relinquished my permissions. I still have my pension pot. Whether I want an annuity or go into draw down I will have to use a regulated adviser – even though I am perfectly capable of doing this myself.
    I can manage my own investments, but I can’t ask an annuity company for a quote or purchase an annuity. I am no longer able to get access to the Exchange. I can’t switch my pensions or go into a drawdown without an adviser.

    So perhaps this Government needs to look at the mechanics before coming out with their great new ideas. Dare I say that it is perhaps far too easy to criticise advisers who are in business to earn a living, rather than the irritating politicians who are there mainly (it seems) to con the public.

  9. @Nic
    Freedom carries with it responsbility. So I guess the real question is how far the state should go in allowing or curtailing those freedoms with the attendant level of responsibility and/or the level of interference in people’s lives.

    I have no doubt that you are concerned to protect those you consider less ble to make those decisions for themselves and so view them as better off having decisions taken from them, very noble. On the other hand Harry probaby thinks that freedom should be cherished, carries a premium and those that scorn it through laziness or fecklessness should pay the price, equally noble. In the end It’s a political question rather than a regulatory or moral one. We all know your leftist political views so aren’t suprised by your stance. We all know Harry’s rightist political views so expect nothing less from him.

    The real issue is that regulation has removed the opportunity for clients with smaller pots to get regulated advice with the protection that goes with it. Working as an IFA 15-20 years ago I was quite willing to meet somone with an average pot (i.e. small), discuss their needs and arrange the annuity on an OMO basis. It was simple and quick for me to do, I took a 3% commission and moved on. Quite possibly I made a loss if I added up my time but I needn’t have worried. The next client was richer, had a bigger pot and I got paid more (starting at 3%, but willing to negtiate less for the big stuff) which by and large subsidised the less well off guy. As a system it was quite ‘leftist’ and the less well off benefitted through this informal re-distribution, cross-subsidisation, call it what you like.

    ‘Ah’, I hear you cry, ‘but what about all those rip-off advisers who took more than they should?’ I have news for you. There are good advisers out there (which make up the vast majority) and bad ones. There always were and there always will be, even in the fee world. Who you get is largely based on luck. No amount of regulation or interference will solve that. If you put most of the money spent on compliance and regulation into a fund to compensate the victims of the few baddies and allow the good guys to get on with their jobs there would be money to spare and more advice available.

    Harry has alluded to the consequnces of all this on many occasions both directly and indirectly. The better off are the main winners in all this because they can afford advice (and many now pay less for it) and are positively feted by advisers as a result. The less well off end up payng a proportionately higher amount and are effectively priced out and shunned. Worse – they are driven into execution only services or rely on ‘guidance’ which carries no protection when things go wrong (and they will).

    RDR was a right wing policy writ large and has been extremely effective at creating an unconstrained market in advice. In this respect I suspect Harry chuckles quite often, especially so given the support of ‘lefties’ like your good self.

  10. @Grey area – Well said. Looking forward to Nic’s attempt at a riposte.

    The state gave up trying to protect the great unwashed when it brought in the national lottery and encouraged gambling whilst removing the system which meant there was a WEEKEND. People now prioritise their Sky TV, wall size flat screen TV, car and the essential latest mobile phone over their savings…..

  11. @Grey Area

    Do I really come across so right wing? I thought I was just being logical. You make me sound like Mussolini !

    I suppose if you consider business and profit to be right wing then perhaps I am.

    Also you seem to give the impression that I am implacably anti Nic – not so. Many has been the time that I have actually agreed with him – as I am sure he will corroborate.

  12. @Harry – It’s an age thing. I think I am quite liberal, but my children think I am a fascist 🙂

  13. @Harry
    I’m just alluding to basic ideology and the way that tends to push thinkning. The specific point here is how much you hold people’s hand on pensions. Left leaning commentators like Nic will tend towards hand-holding and compulsion to save the individual from the self-serving capitalist oppressor. The right leaning commentators will look to individuals to take personal responsibilty and reap the rewards and failures that go with it. I’m not suggesting that you or Nic represent an extreme like fascism or outright communism but there is a divide and it sems to me to manifest in the thinkning and comments.

    Ideological differences don’t mean you disagree on everything either, sorry if it came across like that. I suspect that like you I agree with much of what Nic says and also applaud many of the questions he raises. It is a shame that he often uses a mud-slinging tabloid approach to discussion rather than something a little more intellectual.

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