Chancellor George Osborne’s Budget reforms could expose savers to a raft of new retirement risks unless policymakers address the underlying problem of consumer inertia, experts are warning.
Under intense pressure to tackle the perceived ills of the annuity market, the Government revealed proposals to hand savers unprecedented freedoms from next April, effectively ending the dominance of annuities. The Chancellor also pledged everyone aged 55 or over will receive “free, impartial, face-to-face guidance” about their retirement options.
While the reforms have been lauded by many as a political masterstroke, there are concerns savers have simply been given new cracks to fall through.
Experts warn the changes do nothing to address the problem of poor consumer engagement, meaning savers risk simply defaulting into a drawdown contract – as opposed to an annuity – without considering the risks associated with these products.
Furthermore, with providers looking to develop their own guidance offerings, will savers really receive impartial help to navigate the new landscape come April?
Members have the right to access the Government guidance – set to be led by The Pensions Advisory Service and the Money Advice Service – but this is not mandatory, meaning many could end up interacting solely with their provider.
Fidelity Worldwide Investment retirement director Alan Higham predicts those who have been sleepwalking into default retirement products will continue to do so and are likely to ignore the offer of free guidance. “The disengaged will either stick with an annuity from an existing provider or take the whole pot as cash”, he says.
The FCA is consulting on the design of the guidance guarantee but Higham argues the regulator’s focus is too narrow and should also include providers.
“We need to get joined-up thinking so that the whole industry realises we are all providing guidance – the regulator has to make a decision about non-advised sales,” he says.
Just Retirement group external affairs and customer insight director Stephen Lowe agrees regulation of providers needs to be ramped up.
He says: “We have been suggesting there should be a second line of defence for those who opt out [of guidance].
“Any communication or guidance given by a pension provider needs much stricter regulation than before to ensure it puts the interests of clients ahead of the interests of
Hargreaves Lansdown head of pensions research Tom McPhail says: “Providers need to be on notice that the FCA will be scrutinising these sales practices, that non-
advised sales will be called to account. There should be no inertia selling – people should have to engage and go through some kind of sales process that has an audit trail.”
Drawdown: The new default?
When the reforms kick in on 6 April, the barriers for entry into drawdown arrangements will be removed entirely. Rebranded as flexi-access drawdown, savers aged 55 and over will be able to take any amount over whatever period they want.
Pension providers and schemes are not obliged to offer the new flexibilities – a “major mistake”, according to Syndaxi Financial Planning director Robert Reid – but members are free to transfer to those that do.
Partnership head of product design Mark Stoppard says some people will be “so confused they will simply take what their existing provider offers”.
“Those who do not want to engage with the guidance process risk rolling over in default drawdown contracts that may not be suitable for them,” he adds.
Shadow pensions minister Gregg McClymont also raises concerns about large swathes of the population potentially buying drawdown products without properly considering the risks.
He says: “Many retirees are likely to display inertia in the face of complexity and purchase at-retirement products from the provider. Market characteristics are likely to display similar features to those which already prevail in the annuities market – with consumers facing a complex array of products many of which may offer poor value for money.”
Scottish Widows chief executive Toby Strauss previously told Money Marketing the insurer was working on updating its drawdown product as this would “effectively” become the default after April.
But Standard Life head of pensions strategy Jamie Jenkins says: “It would be bold of any company if it thinks it can default people into drawdown products. The only
default is doing nothing because you don’t have to take your benefits at any age.”
Default investment challenges
Default investment strategies have evolved around the principle that most people take advantage of the 25 per cent tax-free lump sum and use the rest of their pot to buy an annuity.
This led to the development of lifestyling, where assets are gradually de-risked into cash and bonds as the member approaches retirement.
Does the sudden growth in options for savers mean a drastic rethink is on the way?
Jenkins thinks not. “A couple of things haven’t changed – the 25 per cent is unchanged, as is people’s need to de-risk generally as they get older,” he says.
“Within the remaining 75 per cent that was designed to hedge against movements in annuity rates, you still need to de-risk. A lot of the assets you would use to do that are the same as you would have used before.”
However, auto-enrolment provider The People’s Pension chair of trustees Steve Delo says all DC trustees are struggling with designing appropriate default funds.
For instance, for people aiming to go into drawdown, he says it might make more sense for them to remain 75 per cent invested in equities or diversified growth funds.
Jenkins says Standard Life is working on its proposition, hinting that absolute return funds – which aim to produce positive returns in all market conditions – could have a role to play.
Minesh Patel IFA, chartered financial planner, EA Financial Solutions
The reforms could cause great confusion – too much choice is not always so great. The wealthy seek out advisers, but it’s the people below who clearly aren’t going to want to seek advice. The Government needs to fund qualified financial advisers. At the moment advisers go for high net worth – it would be good to see Government subsiding advisers so they can serve people with smaller pots.
Jason Witcombe, director, Evolve Financial Planning
The guidance guarantee doesn’t change a great deal. It would be lovely if we could just wave a magic wand and sort things out for us but that’s not how the world works – people have to take responsibility. I don’t think we should have something like the NHS of financial advice but perhaps there could be some kind of tax break to help pay for advice at the point of retirement.
The biggest problem with the retirement income market was not lack of choice, it was lack of engagement. Those who made sure they understood what they were buying made good choices and will continue to do so in the new era. Unfortunately, large numbers lost out because they accepted the offer from their own pension provider, trusting they would be offered a fair deal.
It is difficult to be optimistic that the new rules will solve the problems for this kind of retiree because the new rules are not tackling this lack of engagement. Many of the options they will be drawn to are likely to sound good but be far more complex, with higher costs, more investment risk and fewer guarantees.
The “guidance guarantee” is intended to stop these kinds of poor decisions but will it actually work? Members do not have to take the guidance and it is likely many will not want to pay for additional regulated advice. Providers are developing their own versions of guidance, so will savers end up being influenced by the very people the guarantee ideas is designed to sidestep?
Guaranteed guidance could work if it turns retirees into engaged consumers, encouraging them to ask more questions, consider a range of options and to seek out the right professional help.
The weakness is no one will be forced to go through guidance or to take any notice even if they do, which is why we have been suggesting there should be a second line of defence for those who opt out.
Our view is any communication or guidance provided by a pension provider needs much stricter regulation than before to ensure it puts the interests of clients ahead of the interests of the company.
We are optimistic that guaranteed guidance will make many more people realise the importance of personal advice and financial planning in retirement and are strong supporters of adviser directories that enable people to take the next step.
Executed properly, this should help avoid inertia which so often leads to people receiving a poor value deal from their existing provider.
Stephen Lowe is group external affairs and customer insight director at Just Retirement