Mark Wood may have spent his career in the closest the financial services industry comes to an establishment – insurance companies – but he is not afraid to speak out against the Government’s flagship pension reforms.
The outgoing JLT Employee Benefits chief executive wants to cut out millions of people from the new pension freedoms, create an auto-enrolment exemption for small firms and rethink the “triple lock” on state pension increases.
Money Marketing sat down with Wood in his last week at JLT before he handed the reins back to former chief executive Duncan Howorth, who returns after a spell in Asia.
But Wood hints that rumours his departure will coincide with his retirement are wide of the mark. He will not say where the next stop will be in a career that has included leading the AA, Prudential UK and Axa UK, but the look in his eye suggests he is not done yet.
Likewise, his views on Chancellor George Osborne’s radical freedom and choice reforms are not those of a man looking forward to winding down away from the cut and thrust of a changing pensions landscape.
He warns the changes open up a “real prospect of a generation of impoverished pensioners”.
“We encourage people to take money out of savings today, incentivised by having tax relief on the way in, and there’s no tax charge up to the trivial limit on the way out, and then we get to a position where people are in mid-to-late old age and they have run out of money.That’s exactly what we’re seeing in Australia, where they started this experiment 20 years ago – evidently that’s failed.
“It’s the reverse of what financial propositions normally have: it’s jam today rather than jam tomorrow.”
He concedes that, such is the popularity of the reforms, his warnings are “blowing in the wind”, but suggests two “very simple changes” to protect customers.
Rather than everyone having unfettered access to their pension pots from 55, he says, it should start at 75, and then only for pots of £100,000-plus – about three times the UK average.
And annuities still have a strong role to play, he adds, for the vast majority whose priority should be certainty of income.
“Notwithstanding the impact of quantitative easing on suppressing interest rates, annuities for centuries have been the way of converting capital into income. There’s nothing fundamentally wrong with the concept. We’re told this is the new norm, but you have to believe at some point interest rates will revert to the mean. When they do, annuities will be a valuable product again. Demonising annuities is a very dangerous policy play.”
Wood says even very small pension pots should be converted into an income for life. “Some people say if you only have £5,000 in a pension plan, converting that into income is trivial. You can understand that argument. But given life expectancy is accelerating at the rate it is, an annuity gives you a guarantee against markets and how long you’re going to live. That’s massively valuable.”
The plan to extend auto-enrolment to every employer in the land also comes in for criticism. Wood thinks the very smallest employers should be exempted from the requirements and warns while opt-out rates have been low so far, the real test will come when contribution rates rise.
“There ought to be a cut-off. I’m not sure at what level, but intuitively it feels appropriate that below a certain level the burden of having to run auto-enrolment for employees is inconsistent with the scale and financial stability of the business.”
He says the Government’s commitment to the triple lock on the state pension should be put under greater scrutiny. The promise to up-rate pensions by whichever is the lowest of earnings, inflation or 2.5 per cent is “an institutionalised version of quantitative easing”.
“It’s almost Orwellian to be thinking about the increase in the cost of the NHS, which is about £100bn, at the same as you’ve got something that is £1.6trn unfunded.”
Despite predictions that one in three members of defined benefit schemes would transfer out to take up the new freedoms, so far the flood has been more of a trickle.
But Wood expects this to change. His time at JLT, which advises companies on de-risking schemes, and as founder of specialist bulk annuity provider Paternoster, makes him well placed to comment.
He reports “huge amounts of activity” from sponsors offering members higher flat pensions in return for giving up their right to indexed payments.
He says: “As soon as we have regulatory clarity over the appropriateness of transfer values and the format of advice people are given, schemes will feel a lot more confident in offering transfers. There’s a lot of hesitation among large corporates that there’s not sufficient clarity over how the transfer offer should be made and what best advice constitutes.”
Wood adds there is uncertainty over whether employers or individ-uals should pay the cost of advice on transfers. But he predicts there will be a boom in so-called insistent clients and that the adviser market will adapt to deal with them.
He says: “When we had the Big Bang in the City and jobbers and brokers were deregulated and retail stockbrokers were created in 1986/87, there was a huge wave of execution-only clients: the equivalent of the insistent client.
“You had to sign quite an elaborate form to declare you hadn’t had any advice and you were dealing on a retail basis. We’re going to have to see some kind of disclaimer that makes people pause and think before making decisions.”
Wood predicts an annuity/equity release product will emerge as the dominant retirement product once the reforms bed in.
“We’ll see people use their capital to buy an annuity for a number of years and then that flips into some form of equity release and the two products get bundled together.
“Drawing equity from property in someone’s seventies will also have the benign effect that the debt compounds at a much slower rate because you start drawing on the product much later in life.”
If Wood’s prophecy seems outlandish, note that he predicted a Conservative majority government when the polls pointed to a hung parliament – and collected a tidy £100 from the bookies.
2011-2014: Chief executive, JLT Employee Benefits
2006-2011: Chief executive, Paternoster
2001-2006: Chief executive, Prudential UK and Europe
1996-2001: Chief executive, Axa UK
1993-1996: Chief executive, AA
1990-1993: Chief executive, MAI
1988-1990: Chief executive, B&C
1983-1988: Head of cash management, Barclays
1979-1983: Treasurer, Commercial Union
1975-1979: Accountant, PwC
1. What’s the best bit of advice you’ve received in your career?
All progress depends on the unreasonable man – the reasonable man conforms to the world the unreasonable man conforms the world!
2. What has had the most significant impact on advice in the past year?
The massive changes in legislation and regulation that have shaped our market.
3. What keeps you awake at night?
4. If I were in charge of the FCA for a day I would.
Book a day’s holiday
5. Any advice for new advisers?
Test your advice constantly to be sure that your clients’ interests are completely and unquestionably best served by the course which you have charted for them.