Does Pension Freedom need a “disinvestment default”?


The success of auto-enrolment in encouraging 7 million new pension savers to stay in, has been attributed to the power of inertia. There may be some goodwill generated by “pension freedoms” but even workplace pension providers accept that most new workers in pensions are there because it was more trouble not to be!

The political imperative has been to get people “in” and as the heat is turned up in April 2018 and 2019, the hope is that the frogs won’t hop out of the pan. The political consequences of how the money saved – will be spent – is tomorrow’s problem. Right now Government’s next big idea is the Pension Dashboard, a concept that gets us thinking of all our sources of replacement income, once we wind-down at work.

But the flows of cash into pensions from auto-enrolment could be dwarfed in 2017 by moneys coming from cash equivalent transfer values from corporate defined benefit schemes. The flows from these schemes are material and are resulting in employers restating their FRS 102 pension liabilities on their balance sheets and trustees re-balancing funds to take into account the massive , unplanned for, cash claims on their funds.

To these two new sources of pension wealth, we can add the maturity of some half a million DC pots each year- as the baby boomers born in the fifties reach their sixties.

Recent data showed nearly 80,000 pension pots were cashed in the third quarter of 2016 and around 40,000 drawdown policies – where cash is exposed to market volatility -were opened. At the same time, 20,000 annuities were sold, a sharp contrast to three years ago, when these policies were the dominant retirement income products.

According to FCA data , fewer than half of those who cashed-out their retirement pots looked for help from a regulated adviser.

This is causing concern among pension and economic commentators. The concern is particularly focussed on the relatively large transfers from “frozen” defined benefit plans. The concern is that much of this money is being treated as “windfall” with no clear plan being put in place of how to replace the income that would have been paid as a “works pension”.

While anyone with a CETV that exceeds £30,000 is required to take regulated advice on whether to transfer, there is no requirement to appoint an adviser to manage what to do with the cash once it arrives. This “windfall” money is an easy target for the scammers.

Perhaps with this in mind, the Financial Times recently hosted an evening seminar for its readers which asked whether such transfers were a good idea. A former pension minister, a senior financial journalist and a wealth manager argued enthusiastically to liberate money but many in the audience expressed worry that they had little confidence they could manage their financial affairs today, let alone in later years.

One reader  quoted Andrew Dilnot’s conclusion to the Care Commisison report “people are unable to plan ahead to meet their care needs”. She told me that if she couldn’t work out what to do today, she was sure she wouldn’t be able to manage her affairs in 20 years (when she would be 85).

Another reader told me of his difficulty finding advice that he could afford, and worried that the cost of managing his drawdown pot would make it financially unviable over time. He had over £150,000 in savings.

While pension freedoms seem to have exhausted the capacity of the post RDR advisory community, they are brewing a public policy problem. Those unaware of their need for advice, or put off by its price feel stuck with a lot of money and nowhere for it to go!

Tim Sharp , who is in charge of pension policy for the TUC recently told Prospect Magazine “Pension freedom asks too much of the individual. There is not the market pressure on providers to offer the kind of producers that are in the long-term interests of low and middle-income savers”.  Our experience providing helplines for members of occupational schemes my company administers backs this up, people are having trouble managing pension freedom.

So while politicians adjust the dial on the pension dashboard, those reaching retirement with pension savings (rather than pensions themselves) are frustrated by not having what the Pension Advisory Service calls a “definitive course of action”. They want to know what to do, and while they like the idea of freedom, they would much prefer to have a “default disinvestment option”!

NEST , the Government workplace pension last year put forward a plan to make the pension freedoms less complex for its four million members (largely low-earners who attractive to financial advisers).

While the plan was put on hold by a Government worried by a potential market distortion, the need for a default retirement pathway has not gone away. The proposals put by NEST would have provided income from a drawdown account, a rainy day cash facility and insurance against extreme old age from a deferred annuity to which the member converts savings from 75. Other solutions – that depend on the Government revisiting the Defined Ambition regulations in the 2015 Pension Act, might allow a drawdown fund to self-insure longevity and even promote itself as a “scheme pension without the guarantees”.

But progress is slow and the need for such services is immediate. Perhaps it is time to dynamise the default! Decumulation may not be as easy as accumulation but it’s every bit as important!disinvest 2




About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
This entry was posted in pensions and tagged , , , . Bookmark the permalink.

4 Responses to Does Pension Freedom need a “disinvestment default”?

  1. ‘While anyone with a CETV that exceeds £30,000 is required to take regulated advice on whether to transfer, there is no requirement to appoint an adviser to manage what to do with the cash once it arrives.’
    True in theory but maybe not in practice. It would be interesting to have some input on this from anyone amongst your followers, Henry, who advises on DB transfers. We do; but our interpretation of the FCA’s regulations may be more risk averse than most.
    The effect of recent ‘clarification’ by the FCA clearly makes it more hazardous to recommend a transfer unless as a firm you will have responsibility for the management of the assets and the draw from them. This is because the transfer advice has to be specific to the receiving scheme’s investment strategy and costs. In an advice process which is structured to be about the quantification of hard differences (probable risk-based ‘income’ relative to a certain income) as well as some soft differences (flexibility etc), advice without ongoing management looks like responsibility for the outcomes without control over them. Incidentally, when we assess the practical liabilities implied by the FCA’s approach, they are as much about how FOS might interpret the FCA rules as how we do.
    The impact on us is that we will not recommend a transfer unless we manage the drawdown – other than in exceptional circumstances where the effective liability is minimal. I noted that James Baxter at Tideway, one of the leading transfer specialists, was recently quoted saying the same.
    The implication is that it may become difficult or impossible for self-directed members to receive the advice needed to transfer to a personal pension or execution-only SIPP; and difficult even for members wishing to transfer to a pension managed or advised by a different firm that does not have the transfer permissions.
    The economics of a ‘standalone’ transfer have the same effect. The regulatory risk needs to be priced and charged for, potentially making a transfer without some contribution from ongoing management fees prohibitively expensive.

  2. henry tapper says:

    It’s a very interesting argument. I’ve written about the risk of becoming liable for the outcomes and I’m amazed that you require to take on the assets. What do your insurers say? I interpreted the FCA’s clarification as a need to consider client cash flows and that advisers were required to know them (not meet them!)

    I am chairing a conference run by Al Rush near Peterborough on 19th June, you should look out for details as it will be dealing with issues like this. Infact you might want to contact Al to speak

  3. Peter Leach says:

    I can’t help but think a blending of underwritten annuity income (based on individual health and lifestyle circumstances) to meet non discretionary spending needs and FAD to meet discretionary spending, both for additional income and capital needs is the answer.

    • Phil Castle says:

      I agree, that is pretty much what many an adviser actually ends up doing for their clients. We use either a Maslow Hierachy of needs of a simplifid version (if a client’s not heard of Maslow) to explain where state pension, final salary pension and annuity fit in and that drawdown is only realistically an otpion once the pyramid has firm foundations.

Leave a Reply