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Paul Lewis: Waking up to poor retirement outcomes

Rather than innovate in the wake of pension freedoms, the industry has taken advantage of unengaged consumers

Are we in the middle of yet another pension misselling scandal? I am not talking about the growth in defined benefit to defined contribution transfers, which of course contains a lot of misselling and much of it is certainly scandalous.

I am talking about the misselling that was laid bare, or at least stripped to its underpants, by the FCA in its Retirement Outcomes Review final report.

It will not, of course, be anything like ‘final’. There are consultations to be done, consultations about consultations, and some of those will be followed by a period of review before further consultations. Such is the nature of the watchdog and, it says, the legal constraints that, ahem, dog its powers.

One hope for 2015 pension freedoms was that firms would develop competitive products for the now officially named decumulation phase. However the report found “we have not seen significant product innovation for mass-market consumers”.

FCA refuses to rule out drawdown charge cap as regulator calls for ‘pounds and pence’ fees

Its findings show why: there is no need. The industry has simply extended drawdown to the mass market. It found that 94 per cent of consumers who accessed their pots without taking advice accepted the drawdown option offered by their pension provider. Even among consumers who took advice, 35 per cent stuck with their provider.

Those figures are far worse than the Association of British Insurers reported in 2013. About half stuck with their pension provider’s annuity even though nearly two-thirds looked at other providers. The failure of that market was the main excuse to introduce pension freedoms in the first place. But compared with the current drawdown market it was a model of competition.

The Retirement Outcomes Review report also exposed why the industry loves drawdown; because it is so profitable – not just at the point of sale as annuities were, but year after year. Whether customers stick with their own provider or find another among the “hard to compare” products, they may well end up with a drawdown product that has average charges of as much as 1.6 per cent a year. That could be made up of some 44 separate charges drawdown products can make in a “complex charging structure” which “consumers may struggle” to assess. Many charges apply when customers choose another provider. No wonder there is “weak competitive pressure”.

Paul Lewis: Investing in gold

The FCA also found that the level of charges was not correlated with the performance of the drawdown product: “the evidence does not show a clear relationship between charges and performance – it is not clear that you get better returns in exchange for higher fees”.

Like many financial products, you do not get what you pay for. Which is why when it comes to investments the only sensible advice is go for the cheapest. If 94 per cent never exercise choice, they are stuck with charges that may be excessive and performance that may be poor.

Despite this clear finding, the FCA reserves its longest and most tortuous process to consider whether a cap on these charges might be a good idea. It will not impose a cap on drawdown of 0.75 per cent, which was recommended by the parliamentary Work and Pensions committee to mirror the cap during accumulation. Instead, it is asking if it should consult on mandating that everyone will be offered a choice of three typical investment pathways – some of which will include drawdown.n.

Is default drawdown a realistic proposition?

If the question is answered yes then it will consult on what to do later this year, including simplifying charges. Then, after the usual papers have been published and an implementation period passed, firms will be given a further year to see if they challenge themselves on the fees charged. There will then be a review of that market data, and then the usual formal procedures after that. Any change before 2022 seems highly unlikely, leaving customers stuck for years with drawdown charges that are “complex, opaque and hard to compare”.

Swifter and firmer action is to be taken on making customers engage more. The last thing most customers want to do is engage with their pension pot. Quite right, too. Engagement is a chimera that simply shifts the blame for poor retirement outcomes on to the hapless consumer who has neither the interest nor the knowledge to engage with their pension pot.

That view is borne out by the FCA’s evidence that only around 5 per cent of people “engage” with their pension when they receive the current wake-up pack: a large envelope stuffed with up to 100 pages of guides, documentation and something called signposting. The pack is, the FCA says, “largely ineffective”. The Treasury agrees.

Ros Altmann: Time to shake up wake-up packs

So, the FCA proposes to replace this failed policy – with a wake-up pack! Instead of just sending it once, consumers will be given the opportunity to ignore it at least four times from the age of 50. It will still be full of paper but – crucially – some of the pages may be different colours and there will be a neat, one-page summary on the front.

Consumer testing by the Treasury found that 10 per cent more people read a clear one-page summary than struggled through a 25-page guide from the Money Advice Service and up to 75 more pages of information. So, the new pack will still be 85 per cent ineffective.

Just two out of a dozen proposals in the three main documents and their 81,293 words. I can feel another column coming on…

Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s ‘Money Box’ programmeYou can follow him on Twitter @paullewismoney



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There are 14 comments at the moment, we would love to hear your opinion too.

  1. I must admit, I love the way (much like most journalists) Paul loves to try and blame someone for clients failing to engage.
    I quote

    “The last thing most customers want to do is engage with their pension pot. Quite right, too. Engagement is a chimera that simply shifts the blame for poor pensions outcomes on to the hapless consumer who has neither the interest nor the knowledge to engage with their pension pot.”

    So basically Paul, your saying that customers not only don’t engage, but shouldn’t.

    Yet you clearly think of yourself as a consumer champion, yet here you are actually saying to consumers “don’t bother engaging with probably the most important financial decision you will ever make”.

    I would suggest that you stop criticising others until you get your own house in order.

    By that, I mean you want to encourage people to actually educate and inform themselves, you might want to explain to them why retirement planning is so important and why they desperately do need to engage.

    Currently Paul, you and your ilk are a major part of the problem, not part of the solution, in fact you are actively hindering any solution to the problem, whilst offering not one single suggestion as to how to actually help.

    A wise man once told me. Don’t criticise anything, unless you can offer suggestions as to make it better. Something Paul, you very much need to learn….

  2. “The report also exposed why the industry loves drawdown; because it is so profitable – not just at the point of sale as annuities were, but year after year. Whether customers stick with their own provider or find another among the “hard to compare” products, they may well end up with a drawdown product that has average charges of as much as 1.6 per cent a year.”

    What is the average annual charge on an annuity – by which I mean the difference between the growth the insurer makes on its annuity book, and the amount paid out to annuitants?

    Lewis seems to think that as advisers and salespeople only receive a one-off payment when an annuity is arranged, the same is true of the insurer, which is obvious nonsense.

    Only once Lewis has given us the typical annual charge for an annuity can we discuss whether consumers are being charged too much for drawdown in comparison to an annuity.

    Other than that, a good and amusing exposure of the pointlessness and ineffectiveness of the FCA’s response to pension freedoms, which is very similar to the Conservative Government’s response to Brexit, or a twelve-year-old’s response to doing its homework; it doesn’t want to do it so it attempts to do the bare minimum required, while still making it perfectly clear that it considers the whole thing to be stupid and therefore it’s not responsible when it goes wrong.

    Let us never forget that the FCA thought the solution to terrible annuity rates was to force insurers to remind people about the Open Market Option in a slightly bigger font.

  3. If poor retirement outcomes are as a result of a few basis points difference in charges, then it suggests the outcome was poor in the first place.

    We have to face facts, if consumers have not saved enough for their retirement then marginal improvements will never solve the problem, simply making the best of what there is. Blaming the industry for high charges is an easy target,and maybe valid, but misses the bigger picture in terms of the so called ” savings gap”.

  4. Nicholas Pleasure 17th July 2018 at 11:29 am

    “Whether customers stick with their own provider or find another among the “hard to compare” products, they may well end up with a drawdown product that has average charges of as much as 1.6 per cent a year. That could be made up of some 44 separate charges drawdown products can make in a “complex charging structure” which “consumers may struggle” to assess. ”

    Paul, this is called unbunding and it was imposed on the industry and consumers by the regulator. Although it offers transparency it makes it almost impossible to compare products.

    I don’t recall where you stood on this particular debate so I’m interested whether you would now prefer to see bundled charges. That is, your drawdown costs 1.5% a year all in, including 0.5% for your adviser (or whatever).

    Personally, I feel that the push towards unbundling and transparency has made complex products completely incomprehensible.

    I also think that this shows the danger of imposing complex products on consumers having decimated the financial advice profession.

  5. “Dear Mr Client,

    As you are now 65 and retiring, I have a great investment for you. If you invest £100,000 today, you will get a guaranteed profit after 22 years (if we ignore inflation). If you live beyond the age of 87, you will not only have received your money back in full, you will then be getting £4,500 per year profit.

    Obviously inflation will have eroded the buying power of the £4,500 to £2,616, assuming inflation of 2.5%”

    And who’d buy or sell an investment like that?

    • Me; well, an indexed-linked one anyway!

      • Have you seen what £100,000 will buy a 65 year old with inflation proofing? Level annuities are bad enough, never mind dropping down to an income of just £250 per month from a £100,000 purchase price.

        It’s an expensive luxury for most people.

    • Dear Mr Client, I have a great investment for you. You give me £100,000 and I’ll then give you your own money back to you, £4,500 at a time once a year. If you manage to live for another 22 years, I’ll then start paying you an actual return.

      You don’t sell storage pods or airport parking spaces as well do you Neil? 😉

      Annuities are good for insuring against longevity risk because the crucial point is that you’ll still be getting £4,500 a year in 22 years’ time and this is 100% guaranteed by the FSCS. However as an investment it’s godawful.

      • I don’t see your logic. I’m not a proponent of annuities in the current market, but that doesn’t make me a purveyor of unregulated rubbish.

        And yes, you’re right, the £4,500 is guaranteed until the client dies, but he’s only a 50/50 ish chance of making it to age 86, and inflation will reduce the buying power of the £4,500. So, what is the real value of that guarantee, and will he get back his £100,000 in real terms?

  6. The new response is to remind people in a different coloured font.

  7. Christopher Petrie 17th July 2018 at 4:32 pm

    People don’t want to engage in probably their biggest liquid asset and Lewis (a financial commentator) says “quite right too”!

    What is this nonsense? Of course it’s not right. I was in my daughters school last week, explaining credit cards to the 6th form. I want them, and everyone, to be engaged with their own money.

    Final Salary schemes are over. 10’s of millions of people have private pension funds. It’s all our jobs to help them understand them, engage with them, and use them wisely.

    “Quite right” that people don’t engage with their own money??!! I still can’t believe I read that idiocy. And from a bloke who has a radio program about money!!!! Why doesn’t he start next weeks show with that line? And see how many listeners carry on.

    Stupid comment of the month.

  8. Adrian Philips 23rd July 2018 at 8:20 pm

    Hi Paul.
    I see your fan club are impressed!
    As usual you make perfectly valid points.
    People don’t engage and I don’t see them engaging any time soon.
    Perhaps the new guidance body, which will have to, and should move into advice at some point, should offer a government backed drawdown with reasonable charges as a water mark to other providers?
    The Glacial pace of reform from the FCA is unacceptable “cold calling ban” anyone! Only been badly needed and known about for 25 years.
    Perhaps if the appearence of the salary in the bank account depended on results things would be different.

    Pension freedoms are the best thing to happen in my time but the Industry seems to need help to offer value for money, as usual.

    This help needs to be provided asap.

  9. Perhaps customers choose not to engage in such important issues because they know there’ll always be an ambulance chaser to put their case with a great deal of hindsight. Someone whose charges will eclipse even the most greedy and incompetent ‘adviser’.

    That’s so much easier and smarter than taking an active interest from Day 1 and seeking out a suitably qualified adviser to guide them through it.

    Perhaps it’s time Mr Lewis retired – assuming he’s able to thanks to some decent advice, of course.

  10. Gosh Paul, you are a bit late to this party!

    Anyone who has read my rants over the past several years know about my antipathy to this woebegone bit of pension innovation.

    As I never tire of pointing out draw down is great for:
    1. HMRC who can collect more tax.
    2. Advisers who can now earn for years, when previously they just earned about 1% by recommending a suitable annuity.
    3. Providers who previously saw their funds under management disappear when an annuity was bought. The annuity became a long term liability for providers until the annuitant died. Now no long term liability just the ability to keep charging.
    4. Fund managers who now see their funds under management swelling with SIPP Investments.
    5. SIPP Providers who thought Christmas had come early.

    What it achieves for the clients is a moot point – and no doubt they swallow all the guff about having control. Yes control to potentially lose money and income, while feeding the financial services industry.

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