Chicken Licken and the pension credit card

This week’s storm in a teacup award goes to the furore surrounding ‘pension credit cards’.

Ever since we heard about the reduced tax on death in retirement we have had the phrase pensions bank account bandied around in the media. It certainly grabbed the public’s imagination – and was a definite improvement on talking about ‘UFPLS’ which was the concept it was employed to describe. At least people understood what it meant. But as soon as we had pensions bank accounts then that led to speculation about pension debit and credit cards and being able to get your pension income from a hole in the wall.

But it has left the pensions industry – and in particular pension providers – running about like Chicken Licken predicting the sky is about to fall in. They are frantically worried about people accessing their money easily and simply, saying that it is sending out the wrong messages, pensions aren’t the same as bank accounts, it will only encourage irresponsible behaviour, people will just go on fancy car spending sprees, and end up with nothing for their later life. Plus it just can’t be done with the amount of paperwork involved every time someone takes an income withdrawal. Plus we – the ‘traditional providers’, that is - are not going to be in a position to do it for a while yet.

I find this an over the top reaction. Let’s get a few things straight. The minute the Treasury created pension freedoms they created the big risk many people will outlive their money. Whether they go on fancy spending sprees, invest it in a too risky environment, invest it too cautiously, underestimate their lifespan – whatever. There are a hundred and one reasons. Giving those people who want it, easier access to their money is not going to really affect this in the big scheme of things. Many people risk running out of funds regardless. I’m afraid that is now life.

And the paperwork point. All this can be overcome with a good will. Just because we have always done income drawdown withdrawals this way doesn’t mean we can’t reform and improve. Those who want to get around the paperwork hurdle will do so.

Providers seem to naturally be taking it on themselves to be the guardians of ‘proper’ consumer behaviour. They are advocating they give the consumer numerous warnings about the risks of running out of funds, and warn of the terrors ahead. They should be applauded, of course, for this. I can’t – and won’t - object to people receiving the right warnings at the right time. But I am at a bit of loss why providers want to don this particular hair shirt, and take the responsibility solely onto their shoulders.

Government created pension freedoms. Government created the vision responsible people will use their funds as they see fit. Government also created the regulator – whose job is to ‘protect consumers, ensure our industry remains stable, and promote healthy competition between financial services providers’.

So, instead of pension providers sat there on the beach like King Canute telling the waves not to come near, they should accept that pension bank accounts and credit cards will happen.  Somebody somewhere will innovate to introduce it. And very soon after April 2015. People will like it and use it. The momentum was created when the Treasury first uttered the words ‘pension freedom’, and it is, to some extent, unstoppable. The genie is already out of the bottle. The idea is already out there.

 I don’t think providers should have to solely take on the role of moral guardians – although they seem very keen to do so. The only one who can halt this particular development is the FCA. If taking pension income from a cashpoint will really encourage very risky behaviour and is a Bad Thing, then it’s up to the FCA to stop this. I appreciate the FCA has a list as long as your arm of what it has to do before April, but this is its job. It’s there to protect consumers and maintain a stable industry.

So, please can it engage in this discussion and say where it stands. Because pension credit or debit cards are coming to a cashpoint near you. And soon.

Automatic enrolement's mid-year report

In 2014, the pension pundits prophesised, automatic enrolment will hit the rocks.

So far the implementation of `automatic enrolment has been relatively stress free. Employers have been doing what they’ve been told to do and enrolling their workers. And employees have also towed the line and stayed put in their pension schemes and paid their money. However, as the size of the employer staging began to get smaller, we all got a little bit jittery. Would employers comply? Would employees opt out? Would there be enough provider capacity?

As the end of 2014 draws into sight we are getting a better idea of how this year has gone. Or at least the first half of it. Evidence of employers’ non-compliance is starting to appear and the Pensions Regulator has issued its first fines – a £400 fixed penalty each for three employers who were April stagers but failed to meet their automatic enrolment duties. As the number of employers staging has gone through the roof this year, I think only three fines is impressive. It seems employers are getting to grips with automatic enrolment, although I am sure there will be more hiccups along the way.

And it also seems employees are also comfortable with the concept. The Department for Work and Pensions (DWP) has just released its qualitative research into employer compliance and opt-out rates. 46 companies were involved in the research. Their staging dates fell between January 2014 and July 2014 and the research covered 7,200 employees (the employers researched had between 90 and 499 employees each). But 44% of the workforces were already members of a pension scheme, and only 35% were automatically enrolled (the other 21% weren’t eligible for various reasons).

Out of those automatically enrolled 12% opted out. OK, that’s a rise from the 9% reported for the 2012/13 intake, but still in the great scheme of things a good solid result. Even when you take into account that a further 2% stopped contributions in the two or three months after the opt-out period closed, bringing the ‘real opt out rate’ to 14%.

Those who opted out tended to be older and/or part-time workers. The main reasons they gave were affordability, already having adequate retirement provision, being close to retirement, employer contributions being too low, or planning on moving jobs soon. So far, all very predictable.

But the research is also interesting for what it tells us about how employers are tackling the automatic enrolment problem, especially when compared to bigger employers last year. For example their implementation costs were a lot lower – usually between £200 and £700. That’s mainly because they did the work in house – the HR professional just added it to the long list of other work they had to do. Bigger employers last year employed consultants and got legal advice so pushing their bill skywards. Instead, the main cost for the employer class of 2014 was time. And their advice to other employers is to take six to nine months to prepare, rather than the three to six months they crammed the changes into. You have to feel sorry for the poor HR professional who got automatic enrolment dumped on their desk.

Of course, smaller employers enrolling later this year and over the next couple of years won’t even have the luxury of a HR professional. So, either the boss will have to do the automatic enrolment work or they will have to employ someone else to do it, which would add to their costs.

This year’s employers are comfortable they can cope with future administration costs. But the escalating cost of employer contributions worries them. The way they think they will cope is by adjusting salary, slowing recruitment or increasing prices. All obvious strategies. I would like to see - in time - a bigger study by the DWP into how employers coped with the costs, and the implications for the labour market.

Finally, the other major concern at the start of 2014 was if there was enough provider capacity to cope with all the employers staging. For our sample of employers that didn’t seem to be a problem. The majority used mastertrusts and the most popular by far was Nest.

So, what’s the verdict of the mid-year report into automatic enrolment? Well, all things considering, it seems to be going fine. Not too many employer fines and a nice low opt out rate. And Nest hasn’t fallen over. Yet. One cynical thought, however, is 46 employers is a very small sample out of the thousands who had staging dates between January and July, and so there are always going to be problems which the research hasn’t uncovered.

Another concern is these are still employers who are pensions savvy – almost half the workforce are already pension savers. Once we move onto employers who are pension virgins, however, a different picture might emerge.

Is the shine coming off pensions freedom?

It’s very hard to argue against the words ‘freedom’ and ‘choice’. So when the Budget announcements hit us in March, they were met with mainly enthusiasm. Most commentators and pension experts agreed giving people more choice was a positive thing. There were concerns, obviously, but the overall atmosphere was one of optimism.

But as time has gone on, we have learnt more about the proposals, and the legislation is now taking shape. And it now seems as if doubts are creeping in about the new world and the potential for people to lose out.  These doubts appear to be clustering around the following:

·         Guidance guarantee – we now know who will be delivering the guidance guarantee, but we don’t know what it will look like, what it will cover, or how and to whom it will be promoted. To get people to take it up we need to sing about it from the rooftops but we are running out of time to get this right.

·         FCA regulation – the FCA has said it will not be strengthening its rules ahead of April, instead relying on the guidance and seeing how that develops before introducing anything new. But there are growing calls for it to develop a ‘second line of defence’ to protect those people who don’t get advice or guidance.

·         Annuity bashing – there is a growing concern the Government and others are ‘annuity bashing’ by positioning annuities as a toxic product, even to the extent of suggesting some annuities should be unwound. A more informed discussion about annuities needs to happen (by all) and how they could help secure a valuable stream of income for retirees.

·         Defined benefit transfers – those with defined benefit pensions may decide to transfer to gain advantage of the hyped pension freedom. Of course, after April, they will need to have taken regulated advice, but even if the advice is to stay put that may not stop some determined individuals, or those who decide to jump ship before April.

·         The risk of running out of funds – the latest survey (from Hargreaves Lansdown) suggests 12% of savers are expected to blow their pension pots next April. But equal to the risk of people just squandering the whole lot, is the risk some will withdraw their funds (either gradually or in full) from pensions, pay too much tax, end up in poorer or higher charging investments, and outlive their funds. The Government, however, appears to be laissez-faire about the risk people end up with just a state pension in their later retirement. The other side of the coin, obviously, is the tax windfall the Government can expect from withdrawn funds.

I’m not saying the reforms are ‘doomed’. Of course, they’re not. But these concerns need to be addressed and resolved before the system goes ‘live’. Unfortunately, however, the Government appears to be resilient to admitting anything is amiss.

The pensions freedom agenda is a fantastic opportunity. But the Government needs to listen to the growing concerns and do something about them. April 2015 is only 160 days away, and there is a lot to do. The Government needs to have courage and if it – and the FCA – can’t achieve what they need to in the time we have left, then the reforms need to be delayed until October 2015 or April 2016 rather than risk people making the wrong decisions.

But these reforms have been brought about on the back of a political agenda. And with a May 2015 election looming, there is no chance the Government will delay them and risk looking bad. There is simply too much riding on this politically.

That’s a shame. I don’t think we don’t have enough time to prepare the ground and introduce these reforms in the right way. And instead the Government is putting politics ahead of people.

 

Better regulation please

Another week, another pensions reform announcement. At the moment, the pace of change feels relentless.

But, for once, the detail of this particular announcement wasn’t important (even to pension geeks like me). Instead, what was significant was the packaging of the announcement, and the reactions it provoked.

Let’s cover the detail to start with. Under the new rules, (if schemes offer it) people can take money from their uncrystallised funds once they reach the minimum age. 25% will be tax free, and the rest taxed as income. This differs from drawdown, where the whole 25% tax-free cash can be accessed in one go, without touching the other funds.

This is not news. We knew all this from previous HMRC announcements. It had even been given a (typically) non-friendly pension acronym of UFPLS, just so normal people wouldn’t have a clue what it meant. And it had two functions. First, to allow a form of phased retirement. And second, to help those schemes who didn’t want to go to the trouble of introducing drawdown (FAD) to provide a way of allowing their scheme members access to their funds on retirement.

But all this has been turned on its head. The Treasury has taken this concept and packaged it very neatly indeed. The headlines this week scream out ‘access pensions bank account’. Isn’t that lovely and friendly? So much better than UFPLS, don’t you think? I think it’s a masterstroke. UFPLS goes from an unloved unwanted concept to a must have.

But it has provoked strong reactions. One must be fear amongst pension providers and schemes. They were busy drawing up plans to offer drawdown to scheme members from April. Only those who couldn’t be bothered with that would have even considered UFPLS. But now, all schemes will be forced to at least think about whether to offer it. Otherwise they risk denying members their ‘freedom’.  (Although my experience is most people want to simply take all their tax-free cash in one go as soon as they can.)

Getting this additional requirement in place for April is going to be a headache schemes and providers can do without. Plus can any provider or scheme live up to the promise that the phrase ‘pension bank account’ evokes? Will people be able to get hold of their retirement fund from a cash machine? Doubt it. The banks with their technology, however, may become interested in accepting transfers of pension funds.

Another reaction is the ‘freedom vs protection’ debate. This has been simmering for some time, but has really caught fire this week. On the one hand some argue people are responsible savers and will therefore be responsible spenders. We should give them the freedom to take their money when and how they want to. And these latest announcements – pensions bank accounts and changing tax rules on death – only encourage people to do the right thing, and not squander their money but leave it in the pension environment for when it’s needed.

On the other hand, there is a growing voice arguing that we are creating a whole host of freedoms with little or no regulation, and that this has the potential to end nastily for some.

I find myself in the latter camp. Of course I trust people. Of course I think they are responsible. But I know that taking a sum of money and making it last for a lifetime is a really difficult trick to pull off. People need to be aware of the risks and if possible protected from them. And that’s the job of good regulation.

The Treasury is hell bent on creating the tax environment for pension freedom. Let’s be honest, it’s a vote winner, at a time when winning the ‘grey vote’ (before it walks to UKIP) has never been as important. But the FCA seems to be on the back foot and playing catch up. It has been thrown several balls over the past few months and is struggling to keep them all from dropping. The flagship of the guidance guarantee is obviously its focus. But its regulation around retirement income is woefully inadequate for the new world.

I’m sure the FCA is busy working on rectifying this. But decisions are being taken now by advisers and people about retirement income, even though the new rules don’t come in until for another six months. So, we need to see updated regulation, including how to protect people under the new rules. And we need to see it soon.

Can we force people to seek out guidance?

The party conference season is, thankfully, drawing to a close. With such a packed pension policy agenda there was never going to be a lack of subjects to chew over. One area always bound to come under scrutiny was the guidance guarantee. And at one fringe event, some were making the case for guidance to be compulsory – rather than relying on people seeking it out themselves.

I can see their point. The retirement market was broken. Before March, too many people ended up buying poor value annuities, probably on the wrong terms for their personal circumstances. But whilst the FCA took its time investigating why in a seemingly endless series of reviews, the Treasury steam-rolled in with a – dare I say it? – lucrative (for them) solution of just getting rid of annuities. Cos that’ll solve the problem right?

I’m not sure it did. And it certainly created a whole host of other problems.

People will now have the freedom to use their pension money in the way they see fit. The problem is, will they know what the best solution is for them? Or will they squander the money? Or hoard it in a poor investment? Or be fleeced in an inevitable scam?

The solution to this, of course, is retirement guidance and advice. Without these, I really don’t think pension freedom can ‘work’. But we need people to seek out and get the guidance they have been promised. And from there hopefully be encouraged in buying advice from a professional adviser.

But the signs, so far, from endless focus groups, aren’t great. Predictions of take-up of guidance range from 10% to 50%. We need to aim higher. But how do we do that? And that’s what led those in favour of compulsory retirement guidance to make their case.

But how do you compel someone to get guidance? One solution may be to bring in a requirement that unless the person has accessed advice then they can’t have a retirement product. But this won’t work on many levels. What happens if they aren’t buying a retirement product? And instead withdrawing the lot and squandering it on a new kitchen (although that doesn’t sound like ‘squandering’ to me)? Or putting it into an ISA? Or if a scam is involved I’m sure there will be devious slights-of-hand to bypass this new requirement.

Maybe instead we should have more draconian requirement that people cannot access their money until they have taken guidance. But are we seriously going to tell people they cannot get at their money? There will be outraged, and quite rightly so. In the end, compelling people to take guidance could simply mean they will be so put off acting they will leave the money where it is and survive on their basic state pension, when, in fact, they are entitled to a much higher retirement income.

Compulsion won’t work. We have to signpost and encourage people to get guidance. It won’t be easy. It will cost money. And results will start off poor. Guidance needs to be mentioned every time we say retirement. We need to ram it down our poor customers’ throats. We need to drag it up at each and every opportunity. We need it in big shiny lights on everything we ever do which mentions future income. And by ‘we’ I mean providers, advisers, trustees, consultants, employers, government agencies, regulators, media, social media, government departments, debt agencies, CAB and so on and so on.

This has to be a collective effort. Otherwise it won’t work.

And once we have successfully got people into guidance, we need the best method of getting them out the other side. Hand offs to professional advice need to be everywhere. The FCA needs to seriously think about the next steps people can take, and what role a new type of simplified advice could play. We cannot push people though guidance and then leave them washed up, gasping for air, and nowhere to go.

Guidance seems a simple easy concept. But it’s not. This is tricky. Very tricky. But we need it to work so the new pensions freedom can also work. Otherwise 2015 and onwards is going to be one big mess.

A mighty big shove into drawdown

The industry was still reeling from the Budget announcements for pensions reform, when yesterday the Chancellor once more waded in with changes. From next April payments from drawdown funds on death of the member will be tax-free if the person dies before age 75, and subject to either marginal rate of tax or 45% if the member was 75 or older.

This move, of course, appeals to many people's basic instinct to try to leave as much money as they can to their family. Even though the Treasury hurriedly reassured the industry that value protection paid out on death of an annuitant will also be tax free (if they die before 75), this still means drawdown compares very favourably against annuities when considering death benefits.

The obvious consequence is that although it has been predicted that many more people will go into drawdown after April, that number has swelled. This move, by the Coalition Government, is designed not to ‘nudge’ people into drawdown, but to ‘shove’ them right in.

And, I don’t believe that is a good thing.

There are well-documented risks with drawdown. The fund is subject to both investment risk, and the risk of people living longer than expected and therefore running out of money. (Although personally I think living longer than expected sounds quite good.) Drawdown is also expensive. Note there is no 0.75% charge cap on crystallised funds, unlike the one which will exist on accumulation funds. And guarantees on drawdown sound great, but could cost the earth. Put simply drawdown is not the right solution for everyone, or at least with all of their fund. It depends greatly on their personal and financial circumstances, the ongoing advice and help they receive, and their attitude to risk.

Now, don’t get me wrong. I love the idea of greater pension freedom. I love the idea of less chance of paying tax when you die. But I also think annuities are a good product for a lot of people, and I want people to take them out, with at least part of their fund, or at some point in retirement. I want them to have security. I want them to have an income that is guaranteed no matter what. Annuities can be - and should be – improved, but there is absolutely no reason to bin them altogether. They play a vital role, especially when combined with drawdown. But the pendulum is in danger of swinging too far the other way in drawdown's favour and eliminating people's want for annuities.

So instead I would like to see a more even playing field. Change the rules so dependants’ annuities are also tax free (if the member dies before age 75). And make sure value protection lump sums are also subject to marginal tax (rather than 45%) if the member dies after age 75.

Because this boils down to one question. Are we completely happy that all the people use all their retirement fund all the time to invest in drawdown? And if we’re not – and I for one am not – then we need to create a level playing field so both drawdown and annuity can work together to provide people with a secure, but aspirational, retirement income.

Confused? You will be

I have just spent an entertaining morning trying to figure out HMRC’s new draft retirement income rules. What a palaver!

There are brand new options and brand new acronyms to get our heads around – UFPLS and MPAA to name but a couple. And new rules about what you can take and when and what proportion is tax-free. It’s a technical geek’s paradise. You will never need to speak English again – just initials.

It’s great to have choice, but this is no picnic. The rules aren’t simple and straightforward, and professional advisers will need to understand the pros and cons, and importantly the tax efficiency, of each route – and what schemes are prepared to offer – before advising their clients.

One of the biggest problems of the old (current) regime was people didn’t shop around for an annuity, and too many settled for an inferior rate with their current provider. But all of these wonderful new rules don’t tackle that essential problem.

HMRC is removing the compulsory requirement to offer members an open market option. Apparently, this is only a legislative tidy-up exercise, and I sincerely hope that when Government re-introduces the requirement, it extends it beyond just those buying an annuity to also apply to those plumping for a FAD or UFPLS as well. My worry is that if the majority just settle for their new options from their current provider then they may not be making the best decisions for their circumstances. They could lose out on eye-watering charges, abysmal investment performance or choice, or poor administration. Hopefully, guidance will nudge people into shopping around, but I would like the legal OMO requirement back all the same.

Anyway, good luck in getting your heads around the new rules. In the meantime, I’m going for a lie down in a darkened room to recover ...

Who will advise the new advice seekers?

I firmly believe this new regime of choice and freedom in pensions will only ‘work’ for customers if we have two things. The first is better tax rules allowing innovation in retirement products such as annuities. (And that’s been promised by the Treasury – draft legislation is due out soon.) And the second is impartial guidance to help people understand their options on retirement.

This is the challenge that now faces TPAS and MAS and others. Design an effective guidance guarantee so that people understand their options and what they can do to provide themselves with an income for the rest of their life.

The accepted wisdom doing the rounds at the moment is that the guidance will explain people’s options to them. And it will hopefully spur a number (as yet unspecified) to seek professional advice to figure out which of these options is best.

I have no doubt that this supposition is right. Some people will seek advice. But what I am curious about is who will advise these new advice seekers?

The FCA has mooted the idea that as advisers will benefit from this new source of customers they should pay some of the guidance costs. But one adviser’s reaction on seeing the potential FCA advisers’ bill for 30% was (and I paraphrase) “why do I have to pay? I don’t want these clients anyway!”. And I think that probably rings true for a number of professional advisers. Sure, there will be some ‘value’ cases that professional advisers will be happy to add to their books. But some of these potential customers will have assets that fall below some advisers’ target markets. And although these new customers may be willing to pay – and see the value in paying - for advice they may not be able to afford quite that much.

So, what will happen to them?

This is a genuine question – I would like to know your thoughts.

Am I wrong? Will all these new advice seekers get swallowed up by the professional adviser market? Is there enough capacity and appetite out there?

Will professional advisers develop some sort of new proposition to be able to ‘service’ them in more cost-effective ways? And can they do that under the current FCA rules?

Is there a role for simplified advice as it stands? Or does it not make economical sense? (If you are employing a professional adviser, then is it just more sensible to let them offer a full advise service? After all, that’s what they are trained to do.)

Or do we need a new solution? I would hate it if we created a new breed of customer who actively sought professional advice but was unable to access it. Even if it was just a handful of people.

Answers on a postcard please ....

What to look out for next week

It’s fast approaching the time when Parliament breaks up for the summer. But before it does, the Treasury has an important job to do. If it wants to get the new pensions freedoms and guidance (proposed in the Budget) in place by April next year then it needs to get its skates on and get the legislation sorted. Time is of the essence.

The first step is Treasury issuing a response to the Budget consultation (which closed in June) before Parliament packs up and go on holiday. In other words, by next week.

This is important stuff. The new proposals are far-reaching, explosive, liberating, and exciting. But they are potentially dangerous for people. It’s great that we are introducing them, but it’s imperative we get the context right. Or else, things could get messy.

Right legislation will lead to new product development creating the right solutions for people. And the right guidance means people can make the most of what’s on offer. My worry is that under the new regime instead of people failing to shop around for an annuity, they fail to shop around for drawdown (or whatever product). If we end up with 50% of people simply rolling over into their current provider’s drawdown fund, then we have failed.

So what am I looking out next week from the Government’s response? Three things.

1.       Flexible legislation. Ideally, the whole legislation underpinning ‘retirement products’ could do with a good sort out and a re-write. But the Treasury hasn’t got the luxury of time. But I do want to see legislation that is flexible enough to allow innovative and useful product development. For example, let annuities go down in value, if that means we can design products that fit the way people want to take income.

2.       Impartial and effective guidance. Getting the guidance right is tricky. Getting the guidance right in the ten months they gave themselves is near enough impossible. So although the right foundations have to be laid now, the guidance has to keep evolving and changing until it’s right. It needs to be impartial, and that means asking someone like TPAS or MAS to take it forward. It needs to be there when people want it – not just a one-off. And it needs to involve the adviser community – at the very least handing over to them whenever appropriate.

3.       Sensible response to tax leakage. Once the pension freedom genie was out of the bottle, the big question on everyone’s lips was how will the Treasury stop the double dipping? The ability to invest big amounts of money (because £40,000 is still a big amount of money) tax-free, and then let people take 25% of that tax-free. The answer could be convoluted and difficult. But I am really hoping that the Treasury decides to be sensible about this. A separate annual allowance for once benefits have been taken (of say £10,000)is simple to explain, simple to administer and simple to understand. It is better to have ‘sanctioned tax leakage’ of a small amount rather than build a complicated convoluted workaround that no-one can understand, no-one can illustrate and is difficult to administer.

So that’s it. The Budget proposals were radical, and hopefully, the Treasury will get the next steps right. And it gives us the summer break to absorb all the glorious detail of the proposals whilst the Treasury is hard at work drafting legislation.

The challenges ahead

Today is the day. This is the final chance for anyone who wants to submit a response to the Treasury on the new plans for pension freedom to do so.

I’ve sent my response off and here are my key points. If you would like to read my full response or to talk over any element, then give me a shout at Rachel.vahey@sky.com

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The Budget proposals are to be welcomed, in that they will give people freedom to manage their money as they see fit. And I sincerely hope this will translate into a greater attraction for pensions, and, as a result, more people invest more money to secure a more appropriate income in retirement. That, after all, is why a lot of us are here.

But we are in danger of creating a whole host of new risks, which mean that people may not get full value from their pensions savings in retirement. I strongly believe we need to do everything we can to give them a helping hand to achieve their dreams. Otherwise, by introducing this flexibility, we are not improving their lives, but instead we are merely placing them in a more difficult situation, where they are unable to live the life they want.

For this pension reform to work, we need two things.

1.       We need to deliver an effective guidance service so people are aware of the risks they face, aware of their options and aware how to get advice.

2.       We also need to create the right legislative and regulatory environment so providers can innovate to develop the best retirement income products.

The introduction of the guidance needs to be viewed as a long-term project. Put something in place by April with the right direction of travel, but continue to develop and change the service until it meets the criteria and it is right for the vast majority of customers.

The Pensions Advisory Service (TPAS) is the best placed to take forward delivering the guidance guarantee, working alongside Money Advice Service (MAS) and Citizen’s Advice Bureau (CAB). Providers should not be involved – they are not impartial.

Alongside this, the new service, the regulator and the Treasury must champion - in strong terms – two key messages:

1.       The more people who receive advice, the more people who will avoid the risks associated with the new pensions regime. We must actively encourage people to take advice.

2.       People need to shop around for the best products (whether that’s design or charges or rates). This message is still appropriate and still needs to be pushed.

The guidance guarantee is challenging but it’s crucial. We need to get it right – otherwise the implications will be catastrophic.

Something else we need to get right is the developments of new products. The new pensions regime offers an opportunity for providers to develop the right products which meet people’s needs, and, importantly, their wants and desires. Primary legislation needs to be changed so it is flexible enough to allow this development. Otherwise, people will run the risk of outliving their money in retirement, with consequences both for the individuals involved and for society as a whole.

Finally, I don’t think we should just spend next year designing the new regime and then letting it set sail into the distance. Instead, I believe we need a formal review of the implications and experience under the new pensions regime. I acknowledge the Government will monitor this. But I advise a formal review is established to report on the new pensions regime and guidance guarantee in 2020, involving external parties representing all elements of the industry working alongside the Government.

Implementing the new pension freedoms and regime is a massive challenge. But if we get it right it can only mean good things for people wanting to make the most of their savings in retirement.

A mass of contradictions

So another year of Parliament will kick off in September, and another Pensions Bill awaits us (as well as another Finance Bill full to bursting with pension amendments). Is anyone else feeling dizzy from this never-ending onslaught of changes to pensions?

We can look forward to the laying down of the rules for the new pensions freedom, as well as the introduction of the defined ambition regime – the third way, for those who don’t want defined contribution and can’t afford defined benefit.

But when laying these two initiatives side by side, it’s becoming increasingly obvious that there is no master plan behind pensions. Instead, it’s a swirling mass of contradictions, and legislation using the piecemeal effect.

Back in 2006, I distinctly remember being promised the introduction of A-day was the end of itty bitty changes and tinkering of legislation. But it’s proved to be anything but.

A few things to draw attention to.

The budget changes bring in autonomy and responsibility. It’s your money; you spend it how you see fit. But the new CDC regime is all about pooling money together (so you have no idea what’s yours and what’s not), and trusting in a higher body to give you the right amount of money at the right time in retirement. So, completely opposing views.

Next year we also get the charge cap for defined contribution schemes. Steve Webb (and others) has lamented the fact that we can only use the charge cap to control fund management charges and not total charges. The industry is in a state of worry (and rightly so) about how much the pesky transaction charges cost someone, and why they aren’t disclosed clearly and transparently.

But how much will CDC costs amount to? Or the guarantees being offered through defined ambition schemes? I strongly suspect we will never know. It seems bizarre to me that we have spent the last ten years travelling towards openness and transparency about how much your pension costs you, and now the new defined ambition regime is driving a cart and horses right through this initiative.

Will the costs fall under a charge cap? I don’t think so, unless the cap’s extended to DA as well as DC. But remember, this new regime is essentially DC. Employers’ costs are controlled – they pay a percentage of earnings (or whatever). Charges will fall to the member. It’s just they won’t have the foggiest what they are.

And the new guidance guarantee will only apply to DC schemes – not to DA or DB schemes. In a way you can understand the logic. Transfers from DB schemes to access the new freedoms won’t be allowed for public sector schemes and might be banned as well for private DB schemes. So these people don’t need guidance.

But what about those in DA schemes (indeed, if any are ever set up)? On the one hand, you could argue they should be treated the same as those in DB schemes. If there is a mass exodus of members at retirement then the pooled scheme will ‘fall over’. But I believe in freedom. People should be allowed to transfer out. It’s just the trustees will hit them hard with a market value adjustment (or whatever it’s called) to cover the scheme’s back. And that’s a tricky decision – stay in the DA scheme for the benefits you are promised (or even guaranteed), or transfer out to DC and spend your money how you want to. People will need help.

Things are happening too fast in pensions. They are not thought through. They are not joined up. There is no master plan.

Instead, politics is driving change. And that means politicians’ needs are at the centre of new developments not customers.

Life expectancy predictions should be for life

Steve Webb’s idea of providing people with a life expectancy calculator received mixed reviews. I happen to think it’s a good starting point. People really do underestimate how long they are going to live. Even if we are given tables of average figures, most of us automatically deduct at least a couple of years (for bad behaviour!).

MGM Advantage recently did a survey which found men thought they were going to die at 81, where the average is 86. And women thought they were going to die at 79, and the average was 89. So, it’s obvious most of us need a sharp prod to get a more realistic idea of how long our money has to last.

But until we get that sci-fi DNA code generator that can work out our exact date of death, we are talking about averages and statistics here. So we need to emphasise the possibilities of living longer than the average. We should be giving people the statistical possibility of them living to 90 or 100. These risks need to be drawn out. If you are aware you have a 15% chance of something happening you may adjust your behaviour and choose to cover/address that risk.

But this cannot be a one-off prediction issued to people only when they ‘retire’. Firstly, because the longer you live, the longer you are predicted to live. So, my predicted life expectancy would be greater at 75 than it would be at 60.

And secondly because things will change. Medical factors will change. Lifestyles will change. (For example a decade ago the Government began pushing companies to reduce the salt in processed foods with the result we ate 15% less salt in 2011 than in 2003.) Even the way we predict life expectancies will change.

So, the conclusion has to be people need to regularly receive life expectancy predictions.

In fact, life expectancy predictions should be for life, not just for retirement.

And that leads us onto how we deliver the original prediction and any subsequent updates. Steve Webb’s idea is life expectancy predictions should be delivered as part of the guidance guarantee. Sure, we can leave people with a calculator to revise the expectancy whenever they want. But will people really do that, and if they do, will they, as a consequence, take any different or new action?

So following this train of thought the guidance, shouldn’t be a one off event either. And when you think about it, it’s inconceivable that it would work that way. The days of people making a single (irreversible) decision at retirement are long behind us. People will need regular and consistent help to make sure their money lasts for their lifetime. However long that may be.

The world has just turned upside down

As far as rabbits went, this was a whopper. A soft long-eared carrot-munching cotton-tailed whopper.

Budget 2014 – and the announcement people can just take their money from their pension without securing any type of income and pay marginal income tax - has just turned the pensions world upside down.

For so long, the Treasury’s mantra – whenever it was approached with an idea of increasing flexibility in the retirement income world – has been “not if it depletes people’s pension funds and increases the chance of people having to rely on the State in later life”. This whole ethos now appears to have been thrown out the window.

It’s early days yet. The dust is still settling and it’s difficult to make sense of how the retirement income world will evolve following this announcement.

Certainly the current model, to some extent, was broken. Not enough people were shopping around, nor taking advice, and instead were carolled into buying an expensive and inappropriate product. Especially if they were in poor health and just rolled over into the ceding provider’s annuity.

What we now have is the ultimate flexibility. Manufacturers have free rein to design the right suite of products for their customers. That doesn’t mean annuities are consigned to the dustbin; these new products could include an annuity from the word go, or the ability to flip over into an annuity in later years.

No doubt some people will blow their entire pension pot within a few years of getting their hands on it. But the vast majority won’t. They realise it has to last them a lifetime. So, the biggest risk may be ‘reckless conservatism’. Some people can’t stand the idea their capital might fall so put it all in the bank. But after ten years of steady withdrawals and no growth, they may just find they run out of funds.

So, where our major challenge lies is making sure everyone – and I mean everyone – gets access to the right guidance to help them make the best retirement decisions.  (Actually, what I really want is everyone to get face-to-face advice, but I just can’t see how we can achieve that.) However, we are starting from a position where the market has failed because too few people could be bothered getting any help or advice, or making an active decision.

This brave new world is going to be exciting. Full flexibility should increase the desire to save and give people a tangible reason to be interested in their saving, like it has in Australia. Manufacturers can now develop and enhance products to meet peoples’ needs.

It’s a fantastic opportunity. But the guidance and advice piece of the jigsaw needs to be firmly in place to make it work.

Another nudge needed

Big day tomorrow. Budget Day is usually when pension geeks cower behind the sofa ready for some new tax onslaught on pensions. But, instead, this year we are hearing encouraging noises that the Treasury might increase the trivial commutation limit up to a (quite honestly) startling £15,000. That would help thousands of people avoid having to buy an expensive and tiny annuity.

In other news, Friends Life reported they had staged 274 schemes for automatic enrolment. But it also reports a ‘significant’ number of employers are only paying 1% employer contribution.

Automatic enrolment is being heralded as a roaring success. Already more than two million new AE pension scheme holders have started saving for retirement. And the 9% opt out rate is eye-wateringly good. But there are challenges ahead – with the so-called ‘twin peaks’ of employers enrolling this summer, and talk of provider capacity crunches.

But I wonder what percentage of employers are only paying the bare minimum in contributions. I haven’t seen any stats on this from the DWP or the tPR. But I’m willing to bet it’s a high percentage. Automatic enrolment is great as a ‘get-them-starting-saving’ vehicle, but we all know that size matters. And the more people save, the better their retirement. Increasing contributions is so much more important in the big scheme, than, say, fiddling around with charges.

So, wouldn’t it be great if the Treasury came up with some money in this year’s Budget to encourage employers to pay more than the minimum 1% into their pensions? Some sort of tax break to reward good employers.

Great. But, I suspect, very unlikely.

No S**t Sherlock – FCA states the obvious

Shock! Horror! The internal annuity market is broken.

So, claims the FCA in its long-awaited Thematic Review of Annuities, published today. In its 36 page report, the FCA states 80% of the people who buy annuities from the ceding provider could have got a more generous retirement income if they had shopped around and bought from a different provider. It goes on to say one in six people could increase their retirement income by more than 10% if they changed provider, and for people with severe health conditions the figure is potentially much higher.

It also has the startling news that the situation is worse for those with pots of less than £5,000 as only a handful of providers offer them annuities.

And what’s the FCA’s answer to this? To conduct a competition market study and further supervisory work.  More reports, which we probably won’t get to see for at least another 15 months.

In a way, I get why FCA had to do the report. It has to get actual proof of the situation, to prove the internal annuity market doesn’t work. But on the other hand, I am staggered it has taken 13 months to state the obvious, to tell us what we already know. And to leave us dangling in the same position, with only the promise of more reports.

This doesn’t take us any further forward. It doesn’t help the hundreds of thousands of people who will retire this year. And it’s not as if its hands are tied. The retirement income market is well aware it has problems. The social media and websites are awash with ideas of what we can do to improve the situation. It’s just a mystery why the FCA doesn’t stop, listen, and act.

For example – I’ll give you five quick hit ideas. None of these are original – there are several providers or organisations recommending these today.

1.       Give people a simple pension passport – gives people all the information they need to shop around. ABI or FCA could introduce this.

2.       Get the provider to obtain a completed health questionnaire – this will highlight the client’s health situation and, if suitable, will push them towards an enhanced annuity. ABI or FCA could action this.

3.       Get people to sign a disclaimer if they stay with the original provider, This means we put in front of them in big letters “are you sure about this? you might be doing the wrong thing”, Again, one for ABI or FCA.

4.       Remove commission. Introduce adviser charging style fees and disclosure for the non-advised channel, so people know –and agree to - exactly what they are paying. One for the FCA.

5.       Finally, get the trivial commutation rules sorted. We should be talking about a level of at least £10,000. HMT should be actioning this.

Please FCA, ABI and HMT. Do something. Don’t just write reports. We need Steve Webb’s idea of a taskforce to identify some quick wins. Because the longer this goes on, the more damage is done to the market, and the more people lose out.

The charge cap: to be or not to be, that is the question?

Today’s announcement from Steve Webb about the potential pension charge cap had half the pension commentators cheering and the other half tearing their hair out.

After asking last Autumn for the fastest consultation period possible, today Webb confirmed the decision on the charge cap has been delayed. Instead he wants the cap to come in by April 2015 (and not April 2014 as previously mooted), and said he will give employers at least 12 months’ notice. The reason for the delay? He was worried about the amount of time employers would have to make changes to their schemes.

This policy is Steve Webb’s baby. His great legacy of this coalition parliament. So, to delay it means it was either a massive victory for industry lobbying or he came under some very uncomfortable pressure from the Treasury. Or both.

Webb definitely wants a charge cap. Although it was headed up as a ‘consultation’ there’s little doubt, despite the OFT’s view, Webb was always going to introduce a cap. We can now expect a paper next month, and Webb’s intention is to introduce the charge cap by April 2015. The problem with Webb’s plans is we need the cap in legislation, and with a general election in May 2015, there’s a real possibility this might get caught up in a legislative traffic jam as the coalition government tries to pass all the remaining legislation milling around as the clock ticks down. And whilst we know this policy is important to Webb, it may not be as important to the rest of Government. Including, significantly, the Treasury.

We do know the cap’s going to apply to all qualifying pension schemes – in other words ones being used to automatically enrol people, or those where the members are people who would otherwise qualify for automatic enrolment. We also (probably) know that active member discounts will go, and will have to be unwound for any scheme set on that basis.

What we don’t know is the level of any charge cap. It’s very unlikely to be above 1%, and much more likely to be 0.75% or 0.5%. And we don’t know what charges the charge cap will cover. Although the talk was of AMC, several have lobbied for all charges to be included including all the pesky fund charges (even the known unknowns and the unknown unknowns – to sort of quote Donald Rumsfeld). And we don’t know what will happen about schemes previously set up on a commission basis.

So, what can we do now? Well, avoid AMDs to start off with. They will only cause problems later on. Only set up schemes with probably at most a 0.75% charge – if that’s possible – to err on the side of caution. And start to look very closely at existing schemes being used to harbour potential automatic enrolment employees. If they are on an ‘old’ basis, they will need to be unwound or shifted, and we may have about a year to April 2015 to take action. But groundwork can be made now.

The charge cap is not yet home and dry. There is still a significant possibility it could be kicked into the legislative long grass. Webb wants qualifying schemes to be pristine clean with low charges and no fiddly AMDs. And the ironic thing is even though he has faffed around with this policy, employers, providers and advisers have all started making the changes necessary for the introduction of the cap. So we could end up with the peculiar position of no charge cap in legislation, but a charge cap in practice.

Transferring annuities - a nil sum game

The pensions industry was woken sharply from its post New Year lull this weekend when Steve Webb put forward the idea of transferring annuities. This idea was, sadly, met with, dare I say it, derision by most of the industry.

Why do I say sadly? True, it was a half thought through idea. First the option already exists, although only a few providers offer it – presumably through lack of interest from annuitants. Second it will never quite get the results people want. People want to transfer to increase their income, probably because their circumstances have changed. But you have to remember transferring is almost always a nil sum game. Generally, actuaries don’t let people work options against them.

So, if you choose to transfer because you have developed health problems and you now want an enhanced rate, then the ceding insurer will work out the transfer value on your new current life expectancy and the instalments yet to pay. You may be able to get slightly better rates in the open market – but it won’t be a step change. Especially when you factor in adviser costs involved in transferring.

What about the incredibly unlikely scenario that rates increase and you bought your annuity at the nadir of the market? I am willing to bet my house actuaries will think about this possibility and work into the original pricing enough cushioning to make sure it doesn’t hurt if this situation arises. Some reckon that would reduce starting annuities by 25%. For everyone. Regardless of whether rates go up or not. Regardless of whether they transfer or not.

So the idea of transferring annuities is not really a flyer.

But it was sad it was met with so much mockery. At least Webb is putting forward a solution. Over the past six months we have spent much of it wringing our hands and saying isn’t it dreadful the annuity market isn’t working. I think the time of analysing is past. We now have to work together to come up with some proper tangible ideas about how to achieve better distribution of annuities and better incomes for pensioners. Let’s hope the FCA review  sparks off a few good ideas.

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The other piece of pensions news this weekend was that David Cameron committed to providing the triple lock guarantee on the state pension for the duration of the next parliament. This is not a light decision. Such a guarantee costs money. But as the PPI has shown it is by far the best way of providing a decent pension, and much more effective than tinkering around with charges. I only hope that in 25 years’ time when I retire the triple lock is still around. But I seriously doubt it.