Pension Freedoms is not about people doing exactly what you want them to. It is about allowing people to do exactly what they want to do.
Yesterday I commended the Aon DC member survey to anyone prepared to submit their details to AonHewitt for a free download. The survey is full of wonderful graphs which, (try as I might) , I cannot steal! So you’ll have to submit yourselves to the onslaught of Aon’s social media marketing in return for a peep at the charts.
Are Aon’s statistics to be trusted? With YouGov doing the polling and the survey producing responses from just over 2000 members of DC pension schemes, the methodology looks sound. The sample seems a little skewed towards the “haves” , with 56% of respondents contributing (between them and their employer between 5-10% of salary. I suspect this is because the sampling concentrated on accessible employers (eg- those with a history of paying money into people’s pensions).
Of course around 1m employers in the UK, don’t pay into employee’s pensions, in fact, they don’t even offer a pension (despite all the tra la la about Stakeholder pensions). Of the 5m employees new to pensions, most are currently getting 2% of a proportion of their pay paid into a pension. It is going to take a few years before the sample provided by Aon becomes representative of the have nots.
What people want
But all the same, this is a survey about what people want and not about what we want them to want.
“The public get what the public want”,
…as Paul Weller sung and there’s no need to go underground with the results.
Only 10% of those surveyed said they intended to spunk the cash on property or good living.
Only 5% were hoarders , investing for care or to pass money on to the next generation
Just 15% reckon they’ll need the flexibility of a pension bank account.
35% of the sample wanted a stable secure retirement income for life (an annuity)
35% of the sample wanted to spend steadily , wanting an annuity in all but name.
These numbers are surprising. They suggest that there is a much higher appetite for a regular income than is generally supposed. The problem with annuities does not appear to be the straight-jacket of a regular income but the way that annuities are working.
I was also struck by the high number of respondents (27%) who wanted to make the key decisions for themselves, more than those who would want to take advice (26%). The remainder of the sample looked to the Government (12%), the current employer (10%) ;-only 4% of respondents would be looking for help from their pension provider.
Aon point out that the high-proportion of those surveyed (50%) who were not intending to pay for advice but were relying on other third parties, looked vulnerable. Aon were also concerned whether the quarter of respondents looking for financial advice, would find it (diminishing numbers of advisers). I would support Aon’s concern, adding to it my concern that those who see IFAs as a source of advice are often those least prepared to pay for that advice.
The need for a new form of advice
The final area surveyed concentrated on those people who intended to use “drawdown” in one form or another. This presumably excluded those 35% who intend to buy a guaranteed income and the early spenders.
This seems the part of the market for whom there is most to do as people’s expectations do not seem to be particularly realistic. 21% of those wishing to use drawdown expected the service to be managed by their employer, this is worrying- we are seeing no appetite among former or current employers to help in this. Of the remainder the splits between those who were expecting to pay for advice and those who would adviser themselves was about the same. There was a higher proportion of people looking to a pension provider 16% and less than 9% intended to use drawdown but hadn’t a clue how this would work.
Taken from an adviser’s perspective, this suggests that only a quarter of drawdown pots are likely to be advised (in the sense IFA’s understand that word).
The cost of not guaranteeing a pension
Perhaps this is the part of the equation we have given least thought to. While abstract solutions abound , the reality is that no one has yet been able to create a foolproof method of guaranteeing higher income than an annuity. The cost of the annuity guarantee, reckoned to be up to 35% of the expected non-guaranteed payment, is clearly too high a price for most people. But the cost of managing without that guarantee, has yet to be calculated.
Typically the costs of managing drawdown on an £80,000 pot run at 50% of the total investment yield making drawdown a very expensive option. These costs reduce as a proportion of the pot till they seem quite reasonable for those with more than £250k investable.
Doing away with the advice could reduce the management costs for those with smaller pots but at the risk that those pots might explode (like my tyre did yesterday when it hit an unexpected pot-hole).
Taken together, the “need for a new form of advice” and the need to find a reasonable “cost for not guaranteeing a pension” seem the biggest challenges facing those developing products for the over 55s.
While people ponder their options (in the absence of suitable product, they seem to be getting to grips with the central dilemma, that there is not enough money in their retirement pots to replace their pre-retirement income.
Nearly half of those surveyed reckoned they would only get an effective pay-cut of between 50 and 80% if they stopped working and relied on pensions. Those who were optimistic were countered by those who thought they might get less. Around 20% of those asked didn’t know how to answer the question.
What appears to be happening is that those approaching retirement are recognising they are going to keep on working. This may be good news for the economy but it may not be good news for employers who might be looking to replace their ailing labour with fresh blood. While professional sportsmen may find they cannot replace their short-term contracts, most of the rest of us cannot be sacked for being old.
Aon are right to be pointing out to large employers that while people are waking up to needing to work for longer (56% of the over-55s intend to work beyond retirement).
While it’s understandable that employers do not want to run drawdown schemes for retired staff, it looks likely that they will need to provide some means of support- if only signposting to one of the new retirement options that will spring up to meet demand.
The one thing that seems certain is that change will happen. The changes have already impacted on the mono-line annuity providers. The statistics in the Aon survey do not suggest that existing pension providers will automatically benefit from the changes.
AonHewitt conclude that those who will win, whether as employers, providers or advisers, are those who “build a deeper understanding”.
That means really getting to grips with surveys such as this and even more importantly, talking to people who are over 50 about what they think.