Back in 2014, in the lead up to the launch of the pension freedoms, I wrote a blog on the perils of unadvised drawdown. I predicted then , what we see today, a large number of people trying to manage a pension out of a pot of money marked “freedom”. It’s like giving a teenager an HGV to drive.

Here, two years after Pension Freedoms went live, is news of the FCA’s latest research into actual market practice.

1. Almost half of those opting for income drawdown in retirement have done so without seeking advice.
2. People going into drawdown are the most likely to have used a regulated adviser but 42% of those opted against advice..
3. The FCA found 178,990 pensions have been accessed by consumers to take an income or fully withdraw their money as cash. Of these 68% were fully cashed out – 88% of which were small pensions.
4. Drawdown figures include customers fully cashing out via drawdown as well as those planning to stay invested.
5. They compared with about a third of people seeking advice when buying an annuity.
6. Overall, people with larger pension pots were more likely to seek advice than those with smaller ones,  whereas small pot holders were more likely to seek the government’s free at-retirement guidance Pension Wise.
7. People with pensions worth between £150,000 and £250,000 were most likely to seek advice (80%), whereas the rate dropped below 30% for those with less than £10,000, slightly skewing the overall result.
8. About two-thirds of those with more than £30,000 in their pensions sought advice before retiring.

The pensions industry has focussed on the statement in bold – that 42% of people in drawdown are not using an adviser. The number doesn’t surprise me.  One person I know is a solicitor , he has a drawdown pot of £1.5m and is using a rule of thumb of 4% drawdown to pay him £60,000 a year. He knows he’s got limited saving capacity as he is at his LTA limit and he knows about the reduced money purchase allowance. He manages his own portfolio and is self-sufficient. If he needs advice, he phones up TPAS who give him the technical help he needs. This kind of person can game the system – this kind of person may well be a member of parliament or sit in the House of Lords, he needs no protection.

You don’t have to be financially aware to have a big pension pot

Someone I met at the FT seminar on pension transfers is a former blue-collar worker with no experience of professional services but with £700,000+ in a personal pension – arising from two DB transfers he has taken recently. He keeps his money in cash (scam avoidance) and avoids financial advisers (scam avoidance). He is paralysed by knowing enough not to put his money at risk, but not enough to invest. His natural risk-aversion is born out of reading newspapers (he told me). He had used an adviser to take the DB transfers – the adviser had been paid from the fund into which he had transferred but this person was not prepared to “plough good money after bad”.

You don’t have to be poor to value a small pension pot

These two extremes show that the challenge facing the FCA is not as simple as segmenting those with more than £30,000 in their pot from those with “de-minimis” pensions. De minimis is a Latin phrase meaning “tending to nothing”. Most ordinary people would regard a pot of money of between £1,000 and £30,000 as anything but de-minimis. De minimis – like most Latin tags is a construct of lawyers whose notion of wealth is very different from the commonwealth.

Many people with “de minimis” pots see those pots as very large indeed. Many of them would like advice but can afford only guidance, the guidance tells them to take advice (which doesn’t help).

Many of those with large pots resent paying for advice. They are either professional investors or simply don’t see the need to pay 50% or more of their prospective pension in intermediation. The man with £700,000 who sits in cash, told me that if he’d wanted an annuity he’d have stayed in his occupational pension scheme. For now he reminds me of those who want to swim but can’t jump into the pool for fear of the unknown.

We need a new normal

I want joined up regulation. On one side of the regulatory fence I see occupational pension schemes and the State, providing people with certainty. On the other I see the FCA trying to regulate using artificial segmentation and meaningless semantics (advice v guidance).

There is nothing that links the two sides of the fence, no half-way house where people can have limited certainty without the perils of drawdown or the parsimony of an annuity.

The opportunity to default into a product which provides a reasonably certain income, longevity protection and full fiduciary protection ceased to exist when occupational schemes ceased offering “added years” for transfers in and Additional voluntary contributions.

The FCA should be asking why occupational schemes pulled up the drawbridge. The answer will be that the risks transferred to the employer were simply too big.

Risk sharing is the only answer

Employers will not take on individual’s market and longevity risk. But individuals are showing they are reluctant to take it themselves. Most are simply cashing out their pensions . The FCA now realise that over 40% who try to convert pot to pension through drawdown are operating DIY strategies (which are now under review). The other 60% are using advice and advisory platforms which are also under review. Only a tiny number of us are still annuitizing.

Eventually the coin is going to drop. Advisory and non-advisory drawdown, cashing out and annuitisation are all precarious in one way or another.

Chatting with my friend Gregg on Friday afternoon, he told me that product managers divided between those who were right for the wrong reasons and those who were wrong for the right reasons. He pointed out to me that a risk-sharing product that pooled mortality and investment risk to produce a reasonably certain income stream was the right product but was wrong for today. Whereas a cleverly marketed drawdown product might be the wrong product but right for today.

We have put risk-sharing into the deep freeze when we put collective DC regulation on hold in the summer of 2015. Now, nearly two years later, the FCA is telling us, what we knew all along, that the market for pension freedoms is in a stinking mess.

The answer to the FCA’s problem is not to force people to take advice when they drawdown, that simply alienates the professional DIY sector and impoverishes those who cannot afford advice.

The answer is for the FCA to start talking with those in tPR and the DWP strategy teams about a risk-sharing solution which can act as “default decumulator”.

This is the new normal, we may have to wait a few years to get it. If a new Government brought a more joined up approach to the management of our DC pension money, then this election might just be worth it!

the DBuffalo