There has been an assumption that through Guidance, Advice and revitalised Product, Britain’s lucky retirees drawing benefits from 2015 will take advantage of the new pension freedoms and things will be alright.
The sharp of sight will have noticed a GAP emerge from my analysis. It’s the GAP between people’s expectations and the pension industry’s capacity to deliver.
The GAP comes from a shortfall in advisory capacity and the unavailability of suitable product.
The advisory gap
At this month’s Corporate Adviser Summit it was obvious that there is no appetite among corporate advisers to help those with small pots (less than £100,000) through drawdown. There are three problems
- Getting people to pay the right fees for initial advice
- Getting people to pay for the care and maintenance of the strategy going forward
- Managing the risks of litigation and regulatory censure should strategies turn sour.
The same picture emerged at a meeting of the Investment Network even more recently. It would seem that for most people, the new pension freedoms will have to be managed on a self-service basis.
The capacity gap
The new pension freedoms are arriving at the wrong time for insurers and trustees who are struggling to meet the demands of auto-enrolment, the charge cap and new Governance requirements.
Creating the functionality to pay money under the new flexible lump sum rules, manage the implications of the new tax rules on death in retirement and the service expectation created by the concept of “a pension bank account” will not be a quick job. The third party administrators who offer services to unbundled occupational schemes are similarly constrained.
There is an assumption that the Guidance sessions offered to all reaching their selected retirement date will point to advisory and product solutions that will fill a further gap- that left by the demise of annuities as the default decumulation product.
The Money Advice Service is currently seeking proposals for how a Directory of Advisers can be created to fill the Advice Gap. It appears that many advisers who have been approached will not take on any enquiries and are quite specific on minimum pot sizes on which they will advise.
If providers are not ready to offer the new freedoms then signposting back to the pot managers may be equally problematic. Having built up an expectation of a “pension bank account”, the Government may find some very disappointed retirees next year. The cynical will point out that by the time the problem emerges we will have a new parliament. This will be an inheritable issue!
There is a prospect of new products as a result of the DA sections of the Pension Schemes Bills. There are two competing opportunities for those designing and delivering products.
The Guaranteed solutions prompted by Steve Webb and Alan Rubenstein’s blue sky thinking are beginning to take and are being branded “synthetic annuities”.
The non-guaranteed solutions look likely to be developed within the CDC proposals. Increasingly CDC is being talked of not as an alternative to workplace pensions (which build up pension savings) but as a “mass-decumulator”, which enables people to spend their savings collectively.
Dealing with longevity
Most people assume that a pension will be for life. It will come as a shock to discover that by adopting the new pension freedoms, this protection is lost. When focus groups ask people what they want from their retirement savings “making sure my money doesn’t run out” is top of the list.
The problem with annuities is the cost of this insurance. Exchanging insurance guarantees by banking guarantees may be one answer, pooling the mortality risk within a mutual enterprise (as CDC does) looks like another.
While politicians can promise everything from Lamborghinis to Pension Bank Accounts, the cold reality is that we are not ready for 2015 and those looking to drawdown next year should be mindful that they will be buying from an incomplete product set and with limited advice.
Our role is to help deliver the product and provide advice we can; but we must also be realistic with our customers. They should mind the GAP.