What’s been happening?
In our articles so far, we’ve mostly been looking at the issues for members of pension schemes who might be considering a transfer out of a defined benefit scheme. In this piece, we thought it might be useful to look back at some of key findings following implementation of Penson Freedoms in the UK, which of course is something the Isle of Man Authorities have been looking at closely and have consulted with industry over the Summer. The UK Financial Conduct Authority (FCA) produced an interim report of their Retirement Outcomes Review which has some interesting findings for everyone involved in this subject.
Among other things (and we’ll pick up the highlights in a minute), the FCA found a worrying direction of travel in two key areas: people entering income drawdown arrangements in retirement without advice, and issues around who is likely to seek advice about what to do with their new-found pension freedom.
What are people doing in the UK?
In a few words, exercising their freedom in large numbers. The FCA found that, since the changes, over one million defined contribution pension pots have been accessed, with nearly two thirds being less than £30k – small when compared with the value of a state pension.
Behaviours have changed: early access (before the age of 65) has become fairly standard, with most taking a lump sum. More than half of those who have accessed their pension in this way have withdrawn their funds fully, and in nearly every case it was the smaller pots that were withdrawn. Most consumers (94%) who made a full withdrawal also had other sources of retirement income as well as their state pension, prompting the FCA to conclude that people were not “squandering” their pensions – although they remain concerned about why people are choosing to move their savings out of pensions.
Double the number of pension pots are moving into income drawdown as were used to purchase annuities – which is where 90% went prior to the new freedoms. This may be the reason that providers have developed ways to allow consumers to understand the changes, and to provide drawdown products that can be bought without advice.
Are there problems emerging?
The FCA can see that there’s still a developing market, but they have highlighted some concerns, one of which is that a mistrust of pensions means that more than half of full withdrawals were transferred into other, different savings or investment vehicles.
Most customers take the easy route and take the drawdown option from their provider, often without advice, prompting the regulator to conclude that further protections may be needed.
Despite the expectation that the new freedoms would lead to a range of new products, that has not been apparent, and in fact there is concern that as providers exit the annuity market, choice might reduce in the open market. In part, though, regulatory barriers may have had a role to play in slowing innovation, and this might well change as time goes by.
So what might happen?
As much as new protections are being examined for those who take income drawdown options without advice, the focus is also about helping people to make good choices by building on the existing initiatives and engaging cooperation from all stakeholders.
At the same time, the FCA has acknowledged that progress will not be made by overloading consumers with more information. Rather, the focus should be, they believe, on making the existing information more useful. They are seeking input on how to do that, along with ideas around ways to help consumers to reach better decisions – and how to rebuild trust in the pensions market.
What about the future?
Those with larger pension pots are more likely to seek advice than those with smaller ones, and while most (on average) seek advice, many do not, and that number is increasing where drawdown sales are concerned.
Given how recent Pension Freedom changes in the UK are, and the uncertainties surrounding the whole subject, it’s understandable that advisers might be nervous about customer complaints – especially because concern about perceived risk around future mis-selling is influencing professional indemnity cover. Some clear guidance is going to be essential if advisers are to provide good quality advice to clients, as well as co-operation and complete information from providers. Work is starting in this area already, as government, industry and regulators in th UK recognise the risk.
Closing thought – Worrying signs ahead…
Concerns over a “brewing pension scandal” are to be raised with UK ministers after the Financial Times reported that savers were being wrongly advised or pressured to give up valuable final salary pension benefits.
Over the past two years more than £50bn has flowed out of company “defined benefit” retirement plans by savers transferring their secure benefits to riskier personal pensions. The surge in transfer activity has been fuelled by recent reforms that made personal pensions more appealing to those who want full control over how they spend their retirement cash, or to pass a fund to heirs.
“Government reforms in 2015 led to the unlocking of pension pots for more than 200,000 people,” Nick Smith, a Labour MP, told the House of Commons on 26th October. “But today’s Financial Times reports high-pressure sales tactics, scaremongering and mis-selling, so may we have a statement? It looks as if another pensions scandal is brewing.”
Andrea Leadsom, leader of the House and a Conservative MP, said the report was “alarming”, adding: “I am sure that he will find a way to raise it with ministers.”
The exchange came as the Financial Conduct Authority was closely scrutinising the pension market for mis-selling following a boom in transfer activity. Four firms, which were not named by the City regulator, stopped advising on transfers when the FCA began to examine the market. The FCA has said it remains in most people’s best interests not to give up a defined benefit pension, which pays a secure, indexed income for life.
Concerns have risen that some advisers are encouraging transfers by using doubts over the security of company pension funds.
As we have suggested previously, a professional pension transfer specialist can be of significant benefit, but do your research on your adviser carefully, value specialisation in this area, and make sure that they are robust in their methods and take a seriously personal approach to their analysis.
