FCA DP16/1 fires starting pistol on Big Think on how to re-engineer financial services market to better meet the needs of a rapidly ageing population
28 February 2016
Adrian Boulding - Retirement
Strategy Director at Dunstan Thomas
The Financial Conduct Authority (FCA) unveiled its
68 page Discussion Paper (DP16/1)
last week with a view to publishing its strategy on the
ageing population in Q2 2017 just over a year from now.
It’s a mighty tome with the great and the good working
within retirement product providers, mortgage providers,
regulators, trade bodies, as well as ‘behavioural
architects’ and psychologists.
As you would expect with the mix of people that have had standalone papers published within this DP, their views and concerns are varied. However, common to many of the pieces is the view that right now we are not doing nearly enough as an industry to make life easy for our ageing population to navigate an often bewildering array of financial choices in-retirement.
Let’s start with some stats on the size of that growing over 65 year old population in the UK. Between 2015 and 2020 the number of UK citizens over the age of 65 will increase by 12% or 1.1m people, as against the increase of the overall population of 3% in the same period. The numbers aged over 85 will expand by 18% (300,000), and the number of centenarians by 40% (7,000). The number of UK people over the current official retirement age has doubled in just 20 years and the over 85 year old age group is now expanding faster than any other age group, as defined by the Office of National Statistics.
At the same time as this monumental demographic shift, Mr Osborne has unveiled the Pensions Freedom & Choice ‘revolution’ and the DB pensions sector look set for complete extinction within a decade. The big, potential success story is Auto Enrolment. At the very least AE has reversed the decline in retirement savings provision. But right now, some 11.9m of us are still under-saving for retirement, despite AE. Interestingly, three-quarters of under-savers are classified as middle- or upper-level earners.
Those that are already exercising ‘Freedom and Choice’ are tending to do so with inadequate recourse to financial advice or even newly-created guidance services. Only 8% of the first wave of ‘freedomers’ since April 2015 decided to use the Pension Wise Service, and only 58% of those going into drawdown in the last six months have decided to get regulated financial advice before doing so.
A woeful number of people are shopping around for drawdown or annuity offerings at-retirement. The feeling is that not enough communication is going on and that the communication that is going out right now is clearly not working that well to equip at-retirees with enough knowledge to make sound financial choices.
One suggestion made in this DP was that a big (legal) stick needs to be wielded in the direction of providers, revising the Financial Services & Markets Act to place a duty of care for consumer outcomes specifically on provider.
Beaming in specifically on the growing group of over 65s, there is a recognition that those in-retirement need more tailored advice and support, more product options better suited to specific later life needs. And frankly they also might need to be communicated with in a different way. They also must not be treated as one homogenous in-retirement group, which they clearly are not.
The Personal Finance Society CEO Keith Richards has called for greater skill-base across the adviser community to support those in-retirement. We already have the Society of Later Life Advisers working to the same ends. The focus is on building certified expertise pools covering areas such as cash flow forecasting, income strategies, portfolio management, use of residential property (i.e. equity release), tax advice (particularly associated with inter-generational wealth transfer), and specialist legal advice. This makes great sense, as there is frankly some very specialist help that is needed and in-retirees need help findings those experts.
In the communications area, we need to think more about how we communicate as well as what we communicate to assist sound financial decision-making. Step forward communications psychologist including Global Head of Behavioural Economics Intelligence & Networks, Liz Barker, who makes it clear that communicating with the elderly is different from the rest of the population. Frankly after the age of 70, the brain is ageing fast and ‘crystallised intelligence’ is declining. More alarmingly, reasoning and deliberative capacity, otherwise known as ‘fluid intelligence’, begins falling from our 30s. She advises:
1. Putting fewer choices in front of this audience in communication if at all possible
2. Categorising and sign-posting choices well – perhaps in terms of risks of not hitting target
3. Increasing ‘cognitive ease’ – using plain English and non-jargon heavy language in communications
4. Focusing on losses that may be incurred if no action is taken at a specific stage, as over the age of 70 we become more loss averse.
As we get older we don’t trust our memories as much, so we also become more at the mercy of scammers who can trick us by playing back ‘false memories’ with a view to taking money from us. That’s before we get into the grim issue of cognitive decline which is becoming a big problem with our ageing population. One in six people over the age of 80 have dementia, amounting to 850,000 sufferers in the UK today. These numbers will more than double to reach two million by 2051. 225,000 will develop dementia this year alone.
The industry is already looking for ways of safeguarding the growing army of the aged. The ABI teamed up with BIBA to publish a Vulnerable Customer Code last month which brokers and pension providers alike are signing up to.
One of the themes that comes through in the DP is the need to get all the information about all potential sources of retirement income in one place, so that in-retirement planning can be made easier. With this in mind, the concept of the Pensions Dashboard (more commonly trumpeted as a way of coping with legacy AE pensions as many of those being auto enrolled today will have many more jobs in their lifetime than the last generation, and therefore will accumulate many more relevantly small AE pension pots) is also championed as a great way for the over 65’s to get to grips with what exactly they have got to draw on in retirement.
NEST’s model for in-retirement planning is also championed. It focuses on developing 3 core funds for different stage of retirement as follows:
1. Income Drawdown Fund
2. Cash Lump Sum Fund (for care bills or clearing last of the mortgage debt)
3. Later Life Protected Income Fund
There is also some discussion in the paper of the totally disinterested being pushed into default policies that are in the long-term interests of the member, and not a service provider.
There is also clear need for people to properly understand ‘longevity risk’ as research shows we underestimate when we are going to die – on average – by 2 years for men and 4 years for women.
Worse than this, if you look at the Australian example of what happens once annuity purchase at-retirement is made voluntary, the tendency to run out of money in-retirement is clear. Down under 40% are running out of money before they are 75 years old, a quarter by the age of 70. We also know from the US experience that many retirees are taking out 8% or more of their retirement savings pot each year in retirement. On average, at that rate you run out of money within 17 years. So if you retire at 65 you will hit the financial buffers aged 82 years. But many of us have parents well into their 80s already, so it is highly likely we will join the growing ranks of the octogenarians ourselves.
It is in this context that decision-makers face considerations like the potential for auto-escalation of AE pension contributions to ward off mass under-saving which the next generation of retirees are currently exposed to.
There is a great deal in this paper which warrants discussion. To quote author Zig Zigler: “The first step to solving a problem is to recognise that it does exist.” This paper lays out the scale of the problem admirably. However, we have a great deal of discussion and innovation to work through before we can hope to solve it satisfactorily.