Pension freedoms shocked the retirement landscape in 2015 and the advice sector has been scrambling ever since to get to grips with the implications.
Ongoing concerns have now led the Association of British Insurers (ABI) to call on industry, governmental and regulatory bodies to collaborate in order to improve the interests of present and future retirees.
People have flexibly withdrawn over £30bn from their retirement pots over the past five years, but people are navigating complex retirement decisions, often unsupported, and taking money out too quickly.
The ABI said in a report published on Tuesday the most recent data shows that full withdrawals had increased to the highest level since the reforms, particularly among those aged 55-64.
Meanwhile, four-in-10 flexible income withdrawals were at an “unsustainable annual rate of 8% and over”.
It added, on average, withdrawing 3.5% from a pension pot annually should ensure a 95% chance of not exhausting savings in retirement; but withdrawing 7% only delivers a 60% chance of not running out of money.
This could be a problem in the future, as more people will be relying on defined contribution (DC) pension savings.
Freedom and choice brings complex decisions
Mike Morrow, wealth and platform director at Openwork, says: “Pension freedoms gave consumers many more options and flexibility about how they manage their money in retirement.
“Unfortunately, many consumers still don’t fully appreciate how valuable a pension is and the increased flexibility and choice that came with the freedoms in 2015 can be perceived by consumers as complex, especially without the right guidance.”
Just Group group communications director Stephen Lowe says: “The reforms are popular, but are they working?
“It will probably be decades before we have the full picture, when those who started taking money at the start of the new era start reaching their mid-eighties and beyond.
“These are early stages; but evidence, such as high drawdown withdrawal rates from modest pensions, does not inspire much confidence.”
ABI calls on stakeholders to improve consumer behaviour
Within the report, ABI called on a variety of institutions involved with the retirement advice market to take action.
One of the first areas it wants to see improvements in is consumer financial behaviour, noting that in 2018/19 nearly half (48%) of people accessed their pension pots without getting registered advice or guidance.
The association said the Financial Conduct Authority (FCA) and HM Treasury should make the most of the Financial Advice Market Review (Famr) and the Retail Distribution Review (RDR), adding the regulator should “consider specifically how a new regulatory regime to support robo-advice could be introduced”.
The recently launched Money and Pension Service (Maps) has been told to “incorporate later life into its pensions workstreams and retain the Pension Wise brand”.
It has also recommended the FCA and the government work with Maps to deliver a consistent “nudge to guidance”.
Other ideas covered:
– Providers to reflect on how best to deliver in-retirement communications, drawing on the ABI’s newly published guide;
– The government to legislate for its planned increase of the normal minimum pension age to 57 in 2028 in line with the state pension age;
– Maps, providers and government to highlight the benefits of setting up powers of attorney in their communications with customers; and
– Financial services industry to continue to work with the Office of the Public Guardian on common issues faced by providers when processing powers of attorney documents.
‘Middle Britain’ most at risk from policy
Just Group’s Lowe adds: “Wealthier individuals are the most likely to be among the winners of the policy because they can afford to take professional advice and more investment risk while sheltering pension assets from inheritance tax.
“It is ‘Middle Britain’, those with small to medium-sized pension assets who depend on modest pension income to sustain their living standards, who are most at risk.
“Clearly a policy that only works for one particular slice of the population but leaves the majority vulnerable is going to struggle to be a long-term success.
“That is why we must do what we can to support initiatives being taken by the FCA around promoting the free, independent and impartial Pension Wise, easing access to advice, controlling pension costs and putting in place default investment pathways.”
Protecting retirees
The ABI report also provided recommendations on how the advice industry can install boundaries to stop retirees becoming penniless.
It has asked the Department for Work and Pensions (DWP) and The Pensions Regulator (TPR) to make employers and schemes issue a warning letter to individuals about their defined benefit (DB) pension scheme before someone is able to transfer out, which should form “part of a wider triage process”.
The FCA has been called on to “take stronger action against scams, including stopping scammers working around the edges of regulation, and banning unregulated investments”.
And Maps should help consumers understand drawdown products and develop a tool to assist with the comparison of investment pathway products.
Jon Greer, head of retirement policy at Quilter, says: “Although a lot of work has been done to protect vulnerable customers and restrict the prevalence of pension scams, they will not go away.
“Steps to ban cold calling and increase awareness of the risk of scams are welcome, but tackling pension scams will be a constant battle that we need to keep fighting.
“It is crucial that these additional protections continue to be re-enforced by ongoing awareness campaigns to ensure that customers are alert to the signs of a fraud.”
Beyond the freedoms landscape
Lastly, the ABI has called on the government to make changes to the retirement and later life advice market outside of just pension freedoms.
It wants to see the government set out its views on what the purpose of a pension is and how these beliefs impact future policymaking.
There should be “a new retirement commission” to advise on policy changes to deliver good consumer outcomes, with a joined-up approach from government departments and regulators.
The ABI said the government needs to collaborate with industry to increase private pension savings, as well as identify how data on wider financial circumstances can be sourced, and undertake research to fill the data gaps.
Yvonne Braun, ABI’s director of policy, long-term savings and protection, says: “This report highlights some warning signs. We urge government and regulators, working with the industry, to act on our recommendations, to deliver the changes needed to improve the outcomes for present and future retirees.”
Later in the year, the ABI will launch a second paper, reporting back on progress, updates on research undertaken, and consider further interventions that government, regulators and industry should take as a result to protect future savers.
