An inquiry into the pension freedoms by MPs may find plenty to fault, across regulator, government and the finance industry, but it will waste its time trying to cram the genie back in the bottle. Instead it should also consider what the future will look like for those running down their pension pots over the next 10 to 20 years.
In fact, advisers should instead focus on making sure their role in the pension freedoms is not found wanting by this inquiry.
Last week the Work and Pensions Committee of MPs launched an inquiry into the pension freedoms.
This is a big deal. The pensions committee is perhaps not as big a gun as the Treasury Committee but it still has the power to make headlines and push forwards an agenda, as evidenced by its inquiry into the collapse of BHS which put significant pressure on the Pensions Regulator to change its approach to takeovers and explain how it let the scheme collapse on its watch.
The committee has listed its terms of reference:
- What are people doing with their pension pots and are those decisions consistent with their objectives? Is there adequate monitoring of the decisions being made?
- Are people taking proportionate advice and guidance and if not, why not?
- To what extent will pensions dashboards enable consumers to make more informed decisions?
- Is Pension Wise working?
- Are there persistent gaps in the advice and guidance market and what might fill them? Is automated advice and guidance filling gaps?
- Is there evidence of product market competition resulting in cheaper, clearer or a wider range of products for consumers? Are people switching from their pension provider? Is an adequate annuity market being sustained?
- Are the government and Financial Conduct Authority (FCA) taking adequate steps to prevent scamming and mis-selling?
- Are the freedoms part of a coherent retirement saving strategy?
Two things can be noted about this list straight away.
Firstly, why include scams? Committee chairman Frank Field said he is ‘particularly concerned that savers are more vulnerable than ever to unscrupulous scam artists’ and that ‘this policy must not become the freedom to liberate people of their savings’. All well and good, scams are a big problem. Probably not enough is being done about them, and the backing for the cold call ban shows there is a significant willingness on the part of both industry and politicians to tackle the problem.
But scams existed before the freedoms, typically in the form of pension liberation. However, the amount lost to pension fraud rose 146% to £13.3 million in the six months after the introduction of pension freedoms, up from £5.4 million for the whole of 2014 (according to City of London Police figures released last year).
Suffice to say it is indeed a massive issue, but perhaps too big to bundle in with some of the structural problems listed alongside it.
Second thing to note is there is no mention of defined benefit (DB) transfers. As Towers Watson senior consultant David Robbins put it on Twitter:
Nothing on DB transfers in @CommonsWorkPen 'pension freedom' inquiry remit. Does "what are people doing with their pension pots?" cover DB?— David Robbins (@David_J_Robbins) September 20, 2017
Bizarrely, Field told New Model Adviser® in August that DB transfers would be in the committee’s agenda.
He said: ‘I am concerned that companies hire the people who are actually going to give the advice.
‘I think this is a treacherous area for people and if they are going to make a move they really need independent expert advice and not salesmen sent along from the company. So this is something we will be looking at.’
Maybe Field thinks DB transfers are too big an issue to deal with in this inquiry. Yet the matter of DB transfers goes to the very beginning of the pension freedoms. The government consulted on whether members of public sector DB schemes would be allowed to access the freedoms along with members of private sector schemes. It decided they could not, and the window of opportunity to transfer out at all closed in April 2015.
A mass transfer out from unfunded public sector schemes would have landed the government with a huge bill. But the 'sky high’ transfer values seen recently cannot be good for private sector schemes, their sponsoring employers or remaining members either.
[UPDATE: the work and pensions committee clarified its terms of reference on Tuesday to confirm DB transfers would indeed be looked at. It updated a line to say it will investigate: 'What are people doing with their pension pots (including DB pension entitlements)...'.]
So, what has put the freedoms on the committee’s agenda?
Political communications and research agency Cicero has published a very useful guide to the committees. As well as the Labour chair Frank Field the committee has four Labour MPs on it, an SNP MP and two Conservatives. One of those, Heidi Allen, is described as often being ’a fierce critic of her own party’. (Kudos for Cicero too on calling the inquiry early: the impact of the pension freedoms was top of its list of likely committee priorities).
However, Cicero’s Tom Frackowiack was keen to dispel notions that this is an overtly political move, but instead was a response to legitimate concerns around pot exhaustion, lack of financial advice in marketplace, the need to introduce default guidance and the threat of scams or mis-selling.
Labour’s position towards the pension freedoms has long been sceptical acceptance. In February its latest shadow work and pensions secretary Debbie Abrahams said the pension freedoms were ‘unravelling’ and has launched a pensions commission to examine the system (a follow up of an earlier pensions report commissioned by Labour which did not seem to feed into any policies)
Labour cautiously backed the pension freedoms after they were announced but this year has been bolder in its criticism. Abrahams said ‘I believe it was a dereliction of duty by the government to make these changes with so little notice and consultation.’
It will be intriguing to see who is called to give evidence (when I last checked this had not yet been announced). Top if the list, you would think, would be the Evening Standard editor himself, George Osborne (pictured above).
I would add to that list Osborne's former chief of staff at the Treasury Rupert Harrison. Harrison is often referred to as a key architect of the pension freedoms and he joined BlackRock after the 2015 election. In January this year Osborne joined Harrison at BlackRock. The move drew attention to the extent to which his new employer – as per a member of the asset management industry - would have benefited from the freedoms.
(As an aside, when Osborne’s appointment to BlackRock was approved by the parliamentary committee responsible for such things, Acoba, the letter of approval said it was ‘reassured’ by the Treasury ‘there were no specific policy decisions from your time in office that would have specifically affected BlackRock’. After we pointed out to Acoba the asset manager was clearly a beneficiary of the pension freedoms it agreed to change the letter to say: ‘whilst you were responsible for general policy decisions that would have affected the asset management industry, none of the decisions from your time in office were specific to BlackRock'.)
Although the announcement was unexpected, the pension freedoms were later sold to us as inevitable.
I remember former pensions minister and now director of policy at Royal London Steve Webb speaking at a Citywire conference in 2015, he explained how the pension freedoms had evolved directly from auto-enrolment. The logic was that the government realised it could not be seen to be enrolling people into annuities, normally referred to as ‘poor performing’ by newspaper headlines at the time.
The new state pension was another policy that was helped to see the light of day by auto-enrolment. Why would people stay opted-in to private savings when doing so could result in state pension benefits being reduced by means testing? For auto-enrolment to succeed means testing had to go, and so did the supposed obligation to buy an annuity.
This tidy logic, though, does not account for the way the policy was announced, by surprise, without consultation. A Budget bombshell for a showboating chancellor maybe?
The FCA did not have much time to prepare itself for the changes but denied it was having to make regulation on the hoof. Still, it only had a year and resulted in some odd consequences. Anyone remember uncrystallised fund pension lump sums? Variable ‘lifestyle’ annuities? There was not much time for the market to respond or for the regulator to properly understand what the freedoms required from regulation. For example, it was not until this year that the FCA decided to review non-advised sales of drawdown products.
As one of our website commenters (EllandRd 1919) put it: ‘Two years since pension freedoms came in. Three years ago drawdown was the highest risk contract for an IFA (probably still is). Now despite numerous comments from the IFA industry about non-advised drawdown the FCA get off their backside. “Quick , close the stable door...too late the horse has bolted”.’
The announcement last week provoked quite a response from Twitter…
Agree. Complexity of choices beyond most consumers. No affordable support for informed choices. Risk of bad choices is far too high. https://t.co/MGtvJupW7a— A Warwick-Thompson (@AWarwickThomps1) September 20, 2017
The status-quo is too attractive to everyone so why change. Increased profits, client enquiries, inflows. It's working for Industry.— Anthony Morrow (@evestoranthony) September 21, 2017
for me longevity risk is one of the key issues for pension freedoms - difficult to assess only 2 years down the line?— Mike Morrison (@AJBellMike) September 20, 2017
The freedoms have however worked out well for the government so far. In fact the Treasury raised £1.2 billion more than it initially expected from pension freedoms last year. The government expected the policy to raise £300 million in 2015/16 rising to £600 million in 2016/17, but the policy has raised £1.5 billion in 2015/16 and its latest estimate for 2016/17 is £1.1 billion.
I would suggest this healthy tax take ought to be included on the committee’s list of questions to the team that devised the policy and made these predictions in the first place.
Still, people are free to withdraw their pension as they please. Though I would caveat that with a quote from the FCA’s recent retirement outcome review interim report. Researchers for the report interviewed members of the public about how they had used the freedoms. One said: ‘Well tax hit me a bit harder than I thought it would. I thought the tax on the whole sum would be about 25%, but it ended up being closer to 35%. It never got explained to me.’
I do not know if ‘Male 55-60 with a £15-30k pot full withdrawal’ had been to his Pension Wise session but I am fairly sure tax would have been on the agenda if he did.
Spotlight on Advice
Complexity, longevity, the status-quo. These are substantial issues. But let’s boil down what this means for those managing these pension pots and tending to retirement plans.
While no doubt this inquiry will dig up the well-rehearsed discussions about the advice gap, the cost and limitations of regulation and access to advice, advisers should first ensure that what they are already doing will stand up to muster. So here are my own terms of reference which advisers can apply to their own internal pension freedoms inquiry:
- Are advisers happy their client will not run out of money before they die?
- A client may be invested for a further decade or more, but early poor returns could severely affect portfolio performance; how are advisers balancing that in terms of their approach to risk?
- How have advisers adjusted their ongoing fee to account for critical yield on a pension transfer?
- And if 4% is considered a ‘safe’ withdrawal rate, how much are fees and charges eating into the client’s income? Are cheaper funds the solution?
- If a financial planner has planned how their client will run down their pot safely, and/or pass pension wealth down the generations, at what point does that client, with their depleted personal wealth, become uneconomic for that firm?
- Turning that question on its head, how can clients be sure their adviser will still be working by the time they retire? How many of today’s retiring clients will be 'sold’ to another firm?
These are questions for a different work and pensions committee in a parallel universe. Or maybe they are the questions advisers should be debating among themselves right now, while MPs dive down the pension freedoms rabbit hole.
Written submissions to the inquiry can be made until 23 October. They can be sent to the committee using this link.