Thanks to the PPI for the second Future Book – Unravelling Workplace Pensions.
The 2016 Edition of the PPI’s study on workplace pension is published today. Getting data on the state of workplace pensions has always been tricky. If you want a comprehensive source for the data you need to construct a business case or write an academic argument, this is your source book.
The report looks to go beyond aggregating Government and private industry data. It has a go at predicting, using the PPI’s own model, where the market will be by 2030 and (in a gentle way) delivers some thoughts on pension policy.
As a side issue, it’s stats on auto-enrolment opt-outs, confirm what we have been hearing anecdotally, that both employer non-compliance and employee opt-outs are much higher among the current generation of stagers (those with less than 20 employees). The opt-out spike for employers with 1-19 employees suggests that workers in these companies are at best “more engaged” and at worst “coerced out” of their workplace pensions.
Thos working for the smallest employers have the highest opt-out rate at 17%. This is almost double the rate of other sizes of employees. Ironically , this group also has the second highest opt-in rate suggesting that the relationship between employers and employees around pensions is much stronger.
Struggling to engage
If there is a central theme to this year’s Future Book (you can compare it to the 2015 editionhere) – the theme is engagement (or the lack of it).
While I wouldn’t want to denigrate the research with bias, the press launch I went to yesterday was held at the offices of an active fund manager. For the fund managers to have any skin in the workplace pension game, they are either going to have to get AE members out of defaults and into their active funds, or get providers and employers engaged enough in active management to get it into the default itself.
So the report focusses on default decision making rather a lot.
But in doing so , it finds itself focussing on a wider and more troubling area of workplace pensions – THE OUTCOME!
The savings battle is over – the spending battle is just beginning!
You get the sense that for most active managers, the battle to get into the accumulation phase of auto-enrolment has all but been lost. The charge cap has seen to that. Even if they say they compete on quality, most workplace pension providers are pragmatic. Half of master trusts report that 99% of membership is invested in the default fund. While actively managed funds proliferate for the 1%, the defaults are overwhelmingly passive.
But the story is very different for fund management when people start drawing on their pensions. The report confirms that there has been a wholesale switch away from buying annuities with those with small pots cashing out and those with bigger pots drawing income from their pot.
This is where things get very interesting
In 2015, 69% of those purchasing drawdown products used independent advice, a drop from 81% in 2014
20% of those purchasing annuities used regulated advice in 2015, a drop from 22% in 2014
The vast majority of people (74%) purchasing annuities in 2015 did so unadvised and 15% of those purchasing drawdown products dis so without regulate or restricted advice.
These stats come from the Treasury’s own research as part of the Financial Advice and Markets Review.
The Future Book points out that there is now a default dichotomy within the pensions landscape. Those in workplace pension schemes are prepared not to make choices and use the default. But those who are exiting these schemes are having to make choices and are increasingly making those choices unassisted.
Deferred annuities – “rape and kill”?
At yesterday’s meeting I asked whether product providers might start to think about building products that did not need advice, which avoided difficult choices and were easy enough for everyone to understand.
Consensus thinking on this is that such a product would involve investing in an actively managed multi-asset fund with limited scope for screw-ups and would tip money into annuities when people had reached a certain age where any level of uncertainty was too high. I am in theory happy with this approach.
However I suspect that it may be seen by those (like me) approaching retirement, as a thieves charter for the financial services industry. One of my friends described the approach as “rape and kill”. She explained that those in drawdown would have their funds denuded by charges sometimes higher than the expected return on the fund and- when the rape stage was over, the customer would be killed off by an annuity.
This cynical interpretation of “deferred drawdown” assumes that cogitative impairment sets in at a point where annuitisation becomes acceptable (typically after the 75th birthday).
People don’t like funds any more than they do annuities.
The accepted wisdom in yesterday’s room was that the decline of the use of advice by those spending their pension pots was a “bad thing”. But one or two of the senior journalists pointed out that it might be that these customers were right and that what the industry should be building is products that don’t need advice, don’t need to be monitored and don’t need to use funds and annuities.
It became apparent from the vox pops displayed in a video played, that most people didn’t like annuities and didn’t trust funds. It also became clear from listening to those on the video that they would much rather be given a decent pension than have to design their own “decumulation solution”.
However, we are probably at the wrong stage in the conversation to accept this very obvious truth, mainly because it denies the advisor, portfolio manager, platform manager, fund wrapper and fund manager, their slices of the action. It might also deny the insurer their last hurrah as provider of longevity protection via the annuity.
Why are people turning away from advice at retirement?
There were a number of answers to this question in the room and as we were probably under (unsaid) Chatham House rules, I won’t attribute them. But the answers which resonated with me were
- People don’t think advice adds any value
- People don’t trust advisers to act in their interests
- People don’t understand the at retirement solutions being presented to them
- There aren’t enough advisers to go round
- Advisers don’t want to talk to people with less than £100k in their pension pot
- We haven’t seen the rise of robo-advice (yet).
I think there’s truth in all these statements , negative as they are.
But my own view is that people are waiting for an obvious solution that doesn’t involve them having to take a decision or take advice. As the PPI are saying, so people are thinking;- they see a “dichotomy of defaults” and want a decision which is as simple as drawing your state pension.
People want a default that is non-advised, provides reasonable certainty and reasonable income and they want to keep their money for themselves.
Frankly this is what I wanted from the Government’s Defined Ambition legislation and it’s something that Government could still facilitate.
If they read the 80 pages of the PPI’s excellent Future Book , Government might even agree !