a financial vaccine?
Yet another consultation (the 11th this year) arrives from the FCA, looking to nudge people of my age into the arms of Pension Wise and away from scammers.
This looks sticking plaster on a wound that will continue to bleed our savings for some time to come. Take up rates for Pension Wise remain low and the dial is not likely to move much once the proposed changes come into place.
I have read the paper but it was heavy going …..
I’m not quite sure how I managed to insert the paper as I did, but I’m keeping it on display because it shows just how long-winded these papers are getting.
In practice, the 39 pages boil down to this
we propose that, when a consumer has decided, in principle, how they wish to access their pension savings, or transfer rights accrued under their existing pension to another pension provider for purposes of accessing their pension savings, pension providers must:
- refer the consumer to Pension Wise guidance
- explain the nature and purpose of Pension Wise guidance, and
- offer to book a Pension Wise guidance appointment.
This is the big idea to get the guidance points illustrated at the top of the page- into play.
Financial vaccination
There is an obvious comparator, it is what the NHS is doing in getting us to go and get vaccinated, where there is pretty well universal take up (see C10-arg blog The public response to vaccine hesitancy – Joseph Robertson)
The way to win people’s hearts and minds is to present a clear counter-factual. If you don’t get vaccinated you run the risk of getting Covid whenever your third wave arrives and what’s more you’ll be limiting your capacity to join into the new normal (as you won’t get a covid passport). I know that isn’t exactly what the Government is saying, but it is what the public is hearing.
For Pension Wise to become as relevant as a vaccination, it is going to have make a promise as compelling and that is a very long way from what the public are seeing. Pension Wise is not going to vaccinate us against scamming , nor is it going to provide us with a definitive course of action about what we should do with our retirement savings. Instead, it is seen by the majority of people I speak to as extremely worthy, very boring and rather ineffective. A bit like going to a vaccination center and not getting the vaccination.
The alternative
Rather than putting people in financial harm’s way, which is what pension freedoms do, why not turn the question round and provide people with a financially healthy way forward that pays them a pension with them having to buy an annuity?
Ensuring that every DC pot has as its default a scheme pension paid from a collective retirement fund is not fanciful. It simply requires any provider, whether the funder of the trust or the supplier of the contract, to offer directly or through a third party, a properly managed collective pension scheme set up and managed to pay a wage for life in exchange for the pension pot.
This doesn’t mean that the current choice architecture of investment pathways should be disposed of, but the variants – cash, annuity and DIY drawdown would be self-select options and only accessed where an individual wanted to make a positive choice.
This may seem like a return to the bad old days of compulsory annuitisation, but it is not. The annuity was the only option unless you could prove you had adequate income elsewhere. The opt-out proposal I’m mooting simply follows the tried and tested approach to pensions which is to put the onus on people to opt-out and not opt-in to the right decision.
The “right decision”
We are of course a long way from having consensus that a CDC scheme pension paid from a collective pool and insured by the collective pool is preferable to the investment pathways.
We are looking for a financial vaccine to protect people at retirement. In my view CDC will pay most people what they want better than any of the investment pathways – it is our best hope going forward.
A CDC pension could be paid from any existing DC trust that was willing to convert to CDC and could be authorised as one by the Pensions Regulator.
I see – within a decade, CDC sections existing as the “wage for life” default option, of all the master trusts and it may be that one or two large employers decide to commercialise their existing DC trust based schemes. Put simply, if I wanted to defray the cost of providing a DC scheme to my members “to and through” retirement, I would offer the facility admit the public to my CDC provided they were transferring benefits from elsewhere and I would admit these savers on commercial terms.
This should not prove a problem for the ABI, whose members are prominent either as funders of master trusts or suppliers of investment platforms and funds that will sit within CDC arrangements. Nor should it be a problem for the PLSA, for whom CDC should be a lifeline for ongoing relevance.
Where these proposals will meet with most opposition will be from scammers who will have to justify the arrangements they propose as opt-outs of collectives – on a value for money basis.
Maybe it would be a good idea to set up State sponsored guidance services for anyone seeking an audit, the writing of a will or conveyance of property.
There is a highly regulated service called Financial adviser that individuals should approach for pensions advice.
” Guidance” falls short of being useful and plainly does not work for the pension beneficiary, it does enrich those running and those who are employed, by the tax payer, to operate these faceless useless entities.
“Rather than putting people in financial harm’s way… provide people with a financially healthy way forward that pays them a pension with them having to buy an annuity?
…. the variants – cash, annuity and DIY drawdown would be self-select options and only accessed where an individual wanted to make a positive choice.
This may seem like a return to the bad old days of compulsory annuitisation, but it is not. The annuity was the only option unless you could prove you had adequate income elsewhere. The opt-out proposal I’m mooting simply follows the tried and tested approach to pensions which is to put the onus on people to opt-out and not opt-in to the right decision.
…Where these proposals will meet with most opposition will be from scammers”
While I’m fairly sure that I’m not a scammer, I’m going to oppose this – but … with a big BUT..
When you put a default in place with an opt-out you have to put something else in place, that you haven’t mentioned.
Informed choice.
Your default may be good for the bulk of people but it will bad for a substantial minority, who would be much better off using drawdown. Those include, as you will know from my too frequent witterings, those receiving means-tested benefits. Even worse, those entitled to, but not receiving means-tested benefits; remembering that about 40% of households entitled to Pension Credit, don’t get it. A figure that’s been substantially the same for the last decades.
That informed choice, under your proposal, needs to be made in two ways.
Firstly, if someone is going to know whether they should opt-out then there are a couple of things that need to happen. They need to know that there are alternatives and that they need to consider them. It needs to be a positive decision not to opt out. Whatever they decide has to be an informed decision. That’s just not possible as things stand.
If you want the decision to be the best for you, as an individual, then you need to know what the results are for each option. In one way that’s complicated and difficult; there are a large number of different ways to use your pensions savings and the results of the pension / tax / benefits sums will be different for each individual. In another way that’s simple, there are systems on the market that do all of that simply and cheaply (advert).
You probably won’t get the information you need to make a proper choice though, particularly if you’re being nudged to Pension Wise, because they’re not allowed to give that sort of individualised information. So you end up with more people being sent to get guidance that, in the end, boils down to ‘we can’t tell you which type of choice is best for you’.
(Oops missed out)
That’s the basis that you think people should then use to decide on opt-outs?
The second informed choice, perhaps, should be by the provider. Why does the default have to be the same for everyone, rather than a default based on what the provider knows about the individual? A couple more data items collected from the saver could refine the type of default choice pretty accurately. It wouldn’t remove the need for better information but it would reduce the amount of damage, if, as seems, likely, the information isn’t there.
(missed from the end of the previous bit)
That’s the basis that you think people should then use to decide on opt-outs?
The second informed choice, perhaps, should be by the provider. Why does the default have to be the same for everyone, rather than a default based on what the provider knows about the individual? A couple more data items collected from the saver could refine the type of default choice pretty accurately. It wouldn’t remove the need for better information but it would reduce the amount of damage, if, as seems, likely, the information isn’t there.
@Gareth Morgan
“Why does the default have to be the same for everyone, rather than a default based on what the provider knows about the individual? A couple more data items collected from the saver could refine the type of default choice pretty accurately. It wouldn’t remove the need for better information but it would reduce the amount of damage, if, as seems, likely, the information isn’t there.”
That seems like an excellent idea!
I wonder if this is something that DC Pension providers would be prepared to take on board?
I hope you don’t mind me commenting here Henry, but I worry about CDC operating in a world of pension freedoms and misleading members into thinking they will indeed know what pension they can look forward to for the rest of their life. There is a real danger of older members selecting against younger members, taking money out of the fund if markets have performed poorly (but before this is fully reflected in transfer values) and there is no provision in CDC as it has been introduced, for risk margins to reduce the value of transferring members’ share.
I also think that just considering age and size of fund is not enough to make good choices – the person’s health, other pension income, work status and financial position (debts, mortgages, family commitments etc) are also important to consider. This is not something that CDC will deal with, especially the situation of someone in poor health, which was a big problem in the old mandatory annuitisation world. The current low interest rate environment and risks of higher inflation also need to be considered if choosing to lock into an income for life right now.
In addition, I do think Penison Wise could and should be offering a very important service to those considering transferring or withdrawing pension money. The best message these people can be given is – don’t take money out when you’re still in your 50s and even into your 60s unless you desperately need to. Equally, I believe most people shoudl not buy annuities until they are well into their 70s or 80s, when the mortality cross-subsidy can be more effective.