Proposals in the Retirement Outcomes Review aim to solve ongoing concerns around consumer detriment
Three years on from the start of pension freedoms, there are still concerns being raised about the workings of the system and what the implications might be for consumers over the longer term. But are these concerns really justified?
Whether you are for or against the freedoms, you have to admit they have proved very popular with the public. On that basis, they are probably here to stay. There are also many in the pensions industry that regularly espouse their virtues. How often have you heard it said that it is the person’s own money and they should be free to spend it as they see fit, not forced to buy a poor value annuity?
That claim is not true in every instance, of course. In a workplace pension arrangement, it is not just the individual’s own money that goes into their pot. Both the employer and the government will have contributed – the former through mandatory minimum contributions and the latter through tax relief. In both cases, this is not simply out of the goodness of their hearts.
Although it may not be happening on any large scale, I often wonder how employers feel about seeing the money they have put into their employees’ pension plans over many years used to fund luxury items, world cruises and the like.
And even accepting the argument that annuities do often represent poor value for a lifetime of saving, how is that relevant to a defined benefit pension many members are now giving up on and risking their futures by transferring out to a much less secure defined contribution plan? The lure of cash is clearly a major influencing factor here.
There is no doubt pension freedoms have changed the whole concept of a pension plan, to something more akin to a long-term savings plan with a pot of cash at the end of the track.
The recent FCA Retirement Outcomes Review final report suggests there is more than a little uncertainty as to how well the freedoms are working in practice, and without some further reforms things could still go badly awry.
The main proposal forcing all providers to establish default investment pathways for drawdown seems to imply a return to the concept that, for most people, the end product of a pension plan should be an income stream of some description, not the wholesale withdrawal of a pot of money.
The other significant proposal to send out much simpler wake-up packs from the age of 50 has a similar ring about it. The evidence clearly shows many new retirees are unprepared to deal with the choices they have to make in relation to their pensions and are largely unaware of the risks they are facing.
There are a number of other proposals directed at providing greater safeguards and improving understanding and experience of the freedoms – although rather surprisingly the FCA has stopped short of introducing a charge cap for drawdown investment pathways, suggesting instead that providers use 0.75 per cent on default arrangements in accumulation as a point of reference.
"The whole pension concept has changed to being a long-term savings plan with a pot of cash at the end of the track"
So, will the FCA’s final report really be the last word on changes to pension freedoms? I doubt it very much. There is much more to say and do about DB to DC transfers, which have been proliferating at an alarming rate.
There is also the risk that, in the years to come, we shall find many older pensioners will have run out of money. Or the reverse may be true and some will have restricted their spending too conservatively.
With this in mind, I would not be surprised to see a lot more tinkering with the rules in the years ahead.
Pension freedom was, and always will be, a controversial policy, with many pros and cons that will only become fully apparent over time.
Malcolm McLean is senior consultant at Barnett Waddingham