The changing face of pensions reform
Martin O'Gorman, VitalityInvest Pensions Technical Analyst
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On 30 April, HM Revenue & Customs released the latest set of flexible pension payment statistics. They show that since the introduction of Pensions Freedoms in 2015 over 1 million individuals have flexibly accessed their pension, drawing a total in excess of £2 billion. Whilst there is no suggestion that there has been wholesale ‘frittering away’ of this pension money the data raise some concerns around the outcomes for non-advised consumers. Proposed intervention by the regulators rightly seeks to address these issues
Prior to the introduction of the reforms the Government had taken steps to adapt the accumulation market to address some of the pressures in that sector: the State Pension was amended to a flat rate amount and contracting-out was withdrawn. Perhaps most significantly, the introduction of auto-enrolment changed the face of workplace pensions so that the default ‘no action’ position for employees is one where they are saving, compared to the original position where it was not to save.
The changes made to the decumulation marketplace in 2015 were seen as being a timely political move by the Government of the time, but reality is that the nature of the retirement market has changed sufficiently to warrant these changes. Populations are ageing, traditional defined benefit workplace schemes are in decline, increased numbers of people are ‘flexibly’ retiring and the annuity market was (and still is) perceived as not working to support its intended target.
Pensions freedoms have delivered the ability for investors to decide, by and large, how much to take from their pension, when they want and in what format they want. The introduction of the retirement risk warning process at the point benefits are taken was intended to provide a stepped approach to support the decision-making process. With the addition of revamped ‘Wake Up’ packs coming later this year, consumers will now have periodic nudges in advance of the retirement decision to consider their longer term plans.
Additionally, the FCA has also proposed the introduction of ‘investment pathways’, having identified that a large proportion of investors in income drawdown are merely accessing their tax-free lump sum, not taking an income and, in a lot of cases, not considering the investment strategy of the remaining pot that is there to support longer-term income requirements. The proposed approach – 4 different pathways to match a specific objective – may prove to be too narrow in its focus where there are differing requirements for an investor’s pension pot that don’t quite fit into a single objective. However, in the main they are likely to give rise to better outcomes for many of those non-advised investors who are currently defaulting their remaining savings into cash at the point they access their lump sum.
The proposal, rightly or wrongly, looks to address an aspect of reform that will likely remain one of the biggest challenges – how to get consumers engaged early enough in the retirement planning process and to understand the benefit of both advice and guidance when undertaking what can be a complex financial decision. Market innovation, one of the aspects identified by the FCA in its Retirement Outcomes Review (which launched in 2016 and concluded in January this year), has not been as supportive as perhaps the FCA would have liked. At the same time, new channels such as robo-advice may take time to become more commonplace in the market. For now, it remains vital for the industry to continue to promote holistic advice and ensure that those who fall outside of advised process are able to access suitable guidance to achieve an appropriate solution to their retirement needs.
Prior to the introduction of the reforms the Government had taken steps to adapt the accumulation market to address some of the pressures in that sector: the State Pension was amended to a flat rate amount and contracting-out was withdrawn. Perhaps most significantly, the introduction of auto-enrolment changed the face of workplace pensions so that the default ‘no action’ position for employees is one where they are saving, compared to the original position where it was not to save.
The changes made to the decumulation marketplace in 2015 were seen as being a timely political move by the Government of the time, but reality is that the nature of the retirement market has changed sufficiently to warrant these changes. Populations are ageing, traditional defined benefit workplace schemes are in decline, increased numbers of people are ‘flexibly’ retiring and the annuity market was (and still is) perceived as not working to support its intended target.
Pensions freedoms have delivered the ability for investors to decide, by and large, how much to take from their pension, when they want and in what format they want. The introduction of the retirement risk warning process at the point benefits are taken was intended to provide a stepped approach to support the decision-making process. With the addition of revamped ‘Wake Up’ packs coming later this year, consumers will now have periodic nudges in advance of the retirement decision to consider their longer term plans.
Additionally, the FCA has also proposed the introduction of ‘investment pathways’, having identified that a large proportion of investors in income drawdown are merely accessing their tax-free lump sum, not taking an income and, in a lot of cases, not considering the investment strategy of the remaining pot that is there to support longer-term income requirements. The proposed approach – 4 different pathways to match a specific objective – may prove to be too narrow in its focus where there are differing requirements for an investor’s pension pot that don’t quite fit into a single objective. However, in the main they are likely to give rise to better outcomes for many of those non-advised investors who are currently defaulting their remaining savings into cash at the point they access their lump sum.
The proposal, rightly or wrongly, looks to address an aspect of reform that will likely remain one of the biggest challenges – how to get consumers engaged early enough in the retirement planning process and to understand the benefit of both advice and guidance when undertaking what can be a complex financial decision. Market innovation, one of the aspects identified by the FCA in its Retirement Outcomes Review (which launched in 2016 and concluded in January this year), has not been as supportive as perhaps the FCA would have liked. At the same time, new channels such as robo-advice may take time to become more commonplace in the market. For now, it remains vital for the industry to continue to promote holistic advice and ensure that those who fall outside of advised process are able to access suitable guidance to achieve an appropriate solution to their retirement needs.