By Adrian Boulding, Director of Retirement Strategy, Dunstan Thomas.
I found myself in a good place after reading all 78 pages of the final report of FCA’s Retirement Outcomes Review (ROR). I felt that sort of bond and comradeship that you feel when you realise that you are not alone in trying to sort one of the world’s ills, and that others are fighting alongside you.
As ROR points out, the majority of people accessing their pension pots (54%) post Pension Freedoms, cash them in completely. The second most popular choice is purchasing an income drawdown policy, which offers no guarantees of stability of sustainable annual withdrawals, or certainty as to whether it will be exhausted well before the customer passes away.
I suppose my concerns stem from hurt pride that, after a lifetime of trying to help people with their pensions, it seems that most just want to cash it in and put it in their local bank or building society, assuming they still have a local branch that is. The FCA’s concern is differently motivated - as always, they are keeping themselves awake at night worrying about the danger of consumer detriment.
Evident detriment is actually quantified by ROR: it says consumers could secure an income that is 37% higher if they chose to invest their pensions pot in a healthy mix of assets rather than holding it all in cash. In other words, they are losing around one third of their pension from poor choices at the very point of decumulation. Ouch! But what’s different here is that the FCA has realised that this isn’t down to some dastardly behaviour by advisers or pension providers. No - consumers are self-harming! The FCA data reveals that non-advised drawdown sales have ballooned from 5% before Pension Freedoms to 31% today. And that in most cases, (between 56% and 76% of cases depending on pot size) the reason for setting up drawdown has nothing whatsoever to do with pensions. It’s because of an urgent desire to get their hands on the tax free cash.
Despite the criticism from Frank Field, Chair of the influential Work & Pensions Committee, that the FCA is moving at a glacial pace, I see some good ideas here that they will implement steadily, hopefully taking care not to create another series of unforeseen consequences as George Osborne did with his ‘rabbit out of the hat’, no consultation Pension Freedoms announcement. I specifically like three:
I also see the ROR review as being good for the annuity market too. I think we are all familiar with the research that shows that, when asked what they want from their retirement, customers describe a stable and secure income that won’t expire before they do. But when asked if they want to buy an annuity they promptly reply, “no way!”
Often this is driven by a reluctance to tie their money up irrevocably too early in retirement. So, the concept of pushing customers to an annual re-appraisal of their needs will repeatedly bring the consideration of annuity purchase back to front of mind for those that originally chose drawdown.
I also see the greater transparency around charges disclosure as another driver for annuity sales. Let me explain: because the costs of an annuity are all contained within the rate, when a client moves from 100% drawdown to 75% drawdown and 25% annuity, they will see a 25% reduction in the pounds and pence cost disclosure on their new annual statement. The idea of repeatedly buying further slices of annuity could be a particularly good way of dealing with clients where investment gains are exceeding income withdrawals, as that will stop the disclosed drawdown charges from increasing each year as funds under management swell.
But my praise for FCA is not un-constrained. Three of its suggestions stick in my gullet:
Overall, we have lots of work to do. Some of it set out in the accompanying CP18/17 which is open for responses until 9th August. But if the FCA manages to implement many of the recommended changes carefully and proportionately, then they can make the decumulation market a better place for the modern DC-dominated customer.
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