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.