In the last few weeks we have seen the FCA’s review on non-advised drawdown and the DWP Select Committee’s 3rd report on the pension freedoms outlining a ‘simple’ package of reforms to create better informed and more engaged pension savers.
The FCA’s review was light on surprises, reiterating that whilst there is a huge amount of information available to members contemplating their retirement savings options, there is a concern that members are putting themselves at risk of financial harm. Given drawdown sales are now double those of annuities and more than 1 in 3 drawdown purchases are non-advised, this is no surprise.
The Select Committee reported that although the pension changes have given individuals choice over their retirement savings, many ‘switch off’ when faced with the ‘bewildering complexity’. They also raised concerns over the ‘large numbers of people buying drawdown products—which carry investment risk and can run out—without fully understanding the consequences’.
Although both bodies appear to understand that there is no one solution to these issues, it seems they believe that given auto-enrolments success, the way forward is to create default drawdown investment pathways that lead to a product to prevent people from holding money in inappropriate or expensive ‘investment’ funds – and so to prevent them running out of money too soon. However, I find the idea of defaulting members into something without a positive choice being made worrying. Firstly, as a financial education provider, we seek to change the behaviour of members through providing engaging and thought provoking information. Although supporters of default pathways see it as a method of increasing engagement, I believe that defaults will have the opposite effect. If auto-enrolment investment choices and nonadvised drawdown choices are an indicator of likely behaviour, then doing nothing will surely be the result? This doesn’t seem a step in the right direction. For example, if a member doesn’t respond to the ‘wake-up’ pack and is defaulted, there may be a number of consequences such as triggering the Money Purchase Annual Allowance or affecting means tested benefits. In addition, as many people will have more than one pension pot (not forgetting other assets that individuals may also hold), if they all default based on individual pots rather than the collective value, the likely outcome for many will be sub-optimal and actually reduce income. Partly because many will end up paying more tax than is necessary and also because the failure to calibrate the changing income needs in retirement with the various defaults that individuals may have.
Secondly, I believe there are issues around the constant refrain of ‘product, product, product’, expecting the answer to complexity simply being ‘product’ innovation for those accessing retirement savings, rather than thinking about a broader service model which allows individuals to understand options before they commit. The PLSA in supporting the Committee’s recommendations says the hard bit is ‘specifying exactly how these products should work, what standards they should meet, and the means by which individuals should access a default or signposted product’.
But in reality income drawdown isn’t a product at all. It’s a strategy for withdrawing retirement savings from a tax wrapper, ideally with other lifetime savings and financial options in mind. And so, I believe that this is not a ‘product’ issue but an engagement issue, where the answer is providing a service proposition before any product is sold or indeed defaulted. If we can agree that the real problem is around engagement, then surely defaulting to an automated decumulation product is the last answer needed. The solution is to get members taking advantage of support services that already exist, in particular professional financial guidance and regulated advice. Although Pension Wise take up is low, the user satisfaction is high and a more confident, knowledgeable member is the result. Members who access financial education programmes and workplace financial guidance services are equally satisfied. Our experience is that they too emerge more confident, knowledgeable and more able to make informed decisions; it has been no surprise to see significant numbers of members changing their retirement plans, increasing pension contributions and seeking out regulated advice as a result.
So before more defaults are created, let’s have more effort to make financial education and guidance the norm!
Director – WEALTH at Work.