Here is the main recommendation of Frank Field and the Workplace Pension Select Committee’sfinal report of its inquiry into Pension freedom and choice published today.
We recommend every pension provider offering drawdown is required, by April 2019, to offer a default decumulation pathway suitable for their core customer group. These would be subject to oversight by existing Independent Governance Committees and subject to the same 0.75% charge cap already in place for accumulation in automatic enrolment. People would still be free to choose to invest and spend their own money as they wished. But if they did not make an active choice, they would move into a suitable and regulated default product.
NEST would be included
Rather than impeding a market that is hardly functioning well, evidence from automatic enrolment suggests that NEST may drive better retirement outcomes by forcing other providers to offer greater value or risk savers switching over to NEST to get a better retirement deal.
Pension Passports should be issued
Trials show that single page pension passports increase consumer engagement with pensions options. We recommend that pension providers are required to issue them.
Providers be required to participate in the Pension Dashboard project
We recommend that all pension providers are mandated to provide necessary information to the pensions dashboard, with a staged timetable to enable smaller legacy defined benefit schemes time to comply.
The dashboard would be a single Government sponsored dashboard and be funded by an industry levy from April 2019.
Taking pension spending away from advisers
Frank Field and the Work and Pensions Select Committee are clearly pushing at an open door. The Government want a more engaged public but they want smart decision making more.
The trouble is that there’s no evidence that the “engaged” take smart decisions. If 53% of those who transferred £34.25bn out of DB schemes are reckoned to have got it wrong (FCA sampling) and if these were advised, then it’s small wonder that there’s a crisis in confidence in retail financial services. The crisis begins and ends with the FCA.
Setting up default decumulation pathways for the non-advised and non-engaged seems a good thing, so long as the default is demonstratively better than the annuity default that preceded pension freedoms.
Having just concluded a review of CDC, where W&P gave the collective approach a big tick, it’s not hard to see what Field & Co would like the default decumulator being.
The rest of the recommendations in the paper are a series of proposals to disintermediate. The pensions dashboard is out of the reach of advisers, being in Field’s vision – a Government project; the midlife MOT , something that might have involved advisers , is dismissed
The introduction of mid-life MOTs should not be mistaken for something likely to have a transformative effect on consumer behaviour.
Where Field does talk of advice it is in the lack of its take up
Most people who have exercised pension freedoms have not, however, taken up financial advice. The PLSA found that 32% of individuals accessing their pots under pension freedoms paid for regulated financial advice. The FCA found that the proportion of drawdown products bought without advice has risen from 5% before the introduction of pension freedoms to 30% afterwards. 63% of all annuity sales in the year to September 2016 were made to non-advised customers
and when he listens to those who have contributed to his Pension Freedoms review, he hears only the negatives
Others witness warned,…,that the “advice gap”, whereby consumers are unable to get advice at a price they are willing to pay, needs to be tackled.131 Advice is perceived as expensive, though as the FCA found that 51% of people would not be prepared to pay for advice at any price, it is not the only barrier. A widespread lack of trust in financial advisers, and a lack of engagement with pensions contribute to this effect. Advisers may also turn away potential clients if advising them is not likely to be profitable
Advisers are likely to be offended by this talk, but may be even more offended by the suggestion that robo-advice be put to the test
We recommend the FCA conduct and publish a review comparing consumer outcomes from face-to-face and automated advice
All in all, this paper comes down firmly on the side of default solutions governed by charge caps and against regulated financial advice. It promotes technology solutions and while it does not mention CDC, it clearly has collective solutions in mind when it talks of empowering NEST.
After all, it was Frank Field who said a recent enquiry session
“NEST should have been CDC from the start”.
I had high hopes of Frank Field as chair of W&P Select Committee but his leadership of the hearings on CDC showed weakness for jumping to convenient conclusions rather than the grappling with inconvenient complexity or contradictions that SC’s ought to be good at. Drawdown is after all my firm’s killer app in terms of applying its core modelling skills to problems of personal financial choice. That makes us highly skeptical about ‘default pathways’ as product solutions. In fact we don’t see retirement funding as a product but rather as a process. And that’s where we most agree with Frank Field: the best form of consumer support for managing retirement spending is likely to come from fintech. And we’re working on it.
The core insight is an ‘intelligent dashboard’: one where all potential sources of retirement spending are brought together (different personal pension products, DB and state safeguarded benefits, non-pension financial capital, downsizing, equity release, potential inheritance) to map a probability-based pathway for spending that is entirely individual. Optimising the pathway (and re-optimising through time) is best seen as the familiar economic logic of ‘maximising utility’, where spending is one, but not the only, source of benefit that can be delivered by money and that its owner values. Spending may have an associated benefit of gifting – either in your lifetime or as a bequest. It has time-based preferences – typically more sooner and less later – that are partly explained by familiar concepts of declining marginal utility (incremental payoffs have less value when most desires largely satisfied) and partly reflect how people think about the consequences of bad outcomes (easier to bear lower spending or trading down when older) and better outcomes (somebody else likely to benefit from late-stage payoffs more than me). There is also a tax-optimisation angle. Whatever the solution adopted, it is likely to feel like one with constraints, contingency plans and optionality as these are necessary to get maximum value (or efficiency) from household capital.
If the intelligent dashboard uses a logic in which resources, time and spending outcomes have to be internally consistent for a plan to ‘work’, it will follow that personal preferences for making it work will directly exhibit the relevant risk preferences and tradeoffs. In fact, risk is likely in most cases to be the variable that makes it work. Though the outputs associated with any adopted risk approach will reveal measures of risk (they could include not only probability ranges for spending outcomes but also value at risk, volatility or max cumulative losses at different stages of the pathway) to which individuals can react by visualising consequences, there is no need to describe or label the risk approach in the way that is required when it is a necessary or expected input to selecting a product or portfolio. Since the current processes for risk tolerance and loss capacity are where so much currently goes wrong, a fundamental replacement for risk discovery is perhaps the most important feature of the intelligent dashboard.
I’m mindful that you are rightly hot on agency conflicts of interest, Henry. I would also like to hold out the prospect that engaging with a problem-solving engine such as one needed to optimise spending outcomes, resources and time horizons can be far more objective and (more importantly) be perceived as such. You could build biases into the decision logic but I think they would be spotted quite easily.
If you’ll forgive some blatant self-promotion, Fowler Drew has for a long time had the decision logic and the modelling and we’re now working on all the different interfaces – every touch point where a prospect/client and/or an adviser can interact with the ‘engine’. To Frank Field, I would say the proof of concept is here,now, but there is still a way to go to demonstrate successful and engaging interface design.
The implementation is not part of the proof of concept. It is fungible. We use a variety of risk-free instruments and equity ETFs and we avoid unitisation but there are many optional routes to achieving necessary scale. Our revenue model is flat fees but that too is just one option – though the holistic scope and proof of agency indifference are both helped by flat fees.
Personally I love the idea of default decumulation pathways. Tailoring may be eminently sensible for high net worth individuals but the majority of my employers’ DC scheme’s 10,000 members don’t fall into that category and, based on past interactions, mostly have extremely limited financial and investment knowledge and skills. Over 98% of them are in the default investment funds and I would imagine would be bamboozled by their choices at retirement and really scared of getting it wrong, whilst also wanting to avoid the cost of advice. Surely that population is crying out for default pathways and, let’s face it, they’re the vast majority, even if most of the pensions industry doesn’t seem to give them that much thought?