Pension Bee have commissioned Dominic Lindsay to write up the results of research they have carried out with 1000 ordinary people aged 55-70 who had access or tried to access and failed or planned to access their pension pot(s). The resulting report is excellent but the turn-out at yesterday’s “Q&A” was tiny and I was the only person asking questions. I continue to ask questions “What is going on?”
No bolt from the blue
The report is the latest in a string of warnings
In April Zurich carried out an online survey of 2,028 adults aged over 55 who had accessed their defined contribution pensions since 1 April 2015. Shockingly, 52% of those surveyed did not know they could reduce their withdrawals, and a further 56% were unaware they could stop withdrawing money altogether.
In July Openwork carried out research from its advisers. The study found 68 per cent of advisers say retirement savers who enter drawdown without advice is their key concern since pension freedoms started in 2015.
But this work is of a different order of magnitude
You can read the report here. I would recommend it to anyone involved with designing or managing investment pathways. It should be required reading for IGCs and GAAs tasked with working our the value for money of investment pathways.
Pension Bee is one of the few organisations gearing up to provide unadvised drawdown. One of the things that this report tells us is that for most DC savers, the spending of their money is a lot harder than the saving of it. To use a regulator’s phrase, it seems to be about “alignment of incentives”. To put it more simply the organisations that have our money have no reason to give it us back. To quote from the report
There are.. an increasing number of people accessing income drawdown without taking advice – 37% of all drawdown customers were non-advised, compared to 5% prior to the introduction of the pension freedoms.
Non-advised drawdown is sold almost exclusively to existing customers of pension firms – inertia still rules the market. 94% of non-advised drawdown sales were to existing customers, meaning that people did not shop around or switch providers compared with 35% of advised sales.
This means that there is only limited market pressure on the large pension firms to improve the service available to non-advised drawdown customers. Driven by a desire for control and a lack of trust, thousands of people have cashed in their pension or taken a lump sum withdrawal and put the money into products with low long-term returns
Those with medium term memories will hear echoes of the state of the annuity market ten years ago with virtually no shopping around , a lack of information, control and trust leading to people taking bad decisions. Worst of all, there seems precious little interest in the subject from anyone, the numbers on this webinar could (according to the Chair) be numbered on one hand.
So what is Pension Bee hearing? It is hearing a cry for help from those most vulnerable to the health and economic threat to COVID-19
It finds that pension firms have not always been giving that help
The coronavirus pandemic has made decisions about accessing pensions harder, there is more worry and a greater appetite to access advice and guidance. But only a small minority of people have been contacted by their provider and feel very well supported to make decisions about accessing their pension.
Many people surveyed were worried about the value of their pension as a result of the pandemic and 40% of those working said they would withdraw money from their pension if they became unemployed
People are ill-prepared to manage such a sophisticated financial product on their own
- For many, pensions have become disconnected from retirement. People are accessing their pension early,leading to them paying too much tax and losing out on potential returns.
- Charges are complex and difficult to compare, many accessing income drawdown are paying high charges – costing people £40 to £50 million extra each year
- People need simple charging structures and products which offer value for money.
- It can be difficult to make decisions about investments and pension providers are not asking people how they plan to access their pension or helping those without advice choose an appropriate investment strategy – this highlights the need for clear investment pathways, however the Financial Conduct Authority (FCA) has delayed the implementation of the new rules.
- Retirement income decisions are daunting and complex and people are less confident making decisions about pensions than other, widely held financial products.
- Those for whom a Defined Contribution (DC) pension is going to be their main source, or a significant source,of income may not have access to good value products and support to help them make a plan and decide howto access their pension.
- People lack basic information about their DC pensions or don’t know how to find it. It is time consuming and difficult for people to gather the information they need to take a decision
- .There are low levels of trust and satisfaction among holders of DC pensions
People are transferring money out of pensions to accounts which give them easier access to their money
- People are accessing their pension without taking independent advice or guidance and are choosing retirement income products without considering important factors which might influence their decision.
- Retirement income products do not accommodate the changing preferences people have to access secure income as they get older.
- Shopping around and switching for those without advice is complex and few do so.
- People are surrendering valuable guarantees and paying more tax than is necessary when they access their DC pension – the pension freedoms have raised £6.2 billion in extra tax revenue for the Treasury, £2.4 billion more than expected
- People don’t understand what represents a sustainable withdrawal rate and many are taking out too much
- People continuing with high withdrawal rates during market downturns will run out of money. Decisions about how much to withdraw each year are complex and pension providers are doing little to help people understand sustainable withdrawal rates or develop withdrawal strategies.
- 8% is considered a sustainable withdrawal rate and 8 is becoming a default number.
So what are the remedies put forward in the report
IGCs and GAAs take note
By April 2021 the IGCs and GAAs charged with issuing value for money assessments on the investment pathways of the providers they govern. They will no doubt say that since the implementation of the pathways has been delayed till February 2021, they have nothing to base their assessments on. This will not wash with me.
If the IGCs and GAAs want a VFM framework for investment pathways, these six points are that framework.
IGCs and GAAs are not full time fiduciaries, they need to access research. They should feel grateful to Pension Bee, not just for the headlines in this blog but for the 90 pages of charts and tables that follow.
I hope that the FCA read the Pension Bee report and that they pick up on the message of this blog. Ignoring the underlying problems of unadvised drawdown will lead us down the same road as we went with annuities and pension transfers . The consumer must be protected but it looks like there is precious little appetite to find out about the problem.
Pension Bee’s research must be taken note of, it should not be allowed to sit on a shelf.
