There has been a lot of focus recently on the tenth anniversary of pension freedoms. But what has been largely overlooked is that, 30 years ago, July 1995 saw the removal of the requirement to purchase an annuity with the introduction of income drawdown.
I recall this significant change in pensions policy vividly as I was working for Winterthur Life — a company that, along with Equitable Life, could claim to be at least partly responsible for the change.
In response to huge adviser and consumer demand, both companies had introduced products — the flexible annuity and managed annuity respectively — that were subsequently determined by the Inland Revenue not to be annuities.
Intense media pressure eventually forced the Major government to acknowledge that change was needed. However, after meeting with government and Treasury officials, it was clear to me there was little real understanding of the implications of this shift — and even less appreciation of the impact that the initial maximum and minimum income limits would have under the new drawdown regime.
Industry reaction to the changes was mixed with a lot of focus on issues such as ‘mortality drag’ and ‘sequencing risk’
Industry reaction to the changes was mixed, with a lot of focus on issues such as ‘mortality drag’ and ‘sequencing risk’. Of course, there have been several iterations of income drawdown between the initial regime and April 2015, when Flexi-Access Drawdown was introduced.
The Nobel prize-winning economist William F Sharpe said that “self-managing lifelong income from a DC pot is the nastiest, hardest problem in finance”.
More recently, in an article for Money Marketing, Baroness Altmann said that “retirement income decisions are not straightforward and most people need help or advice”. In examining the impact of ten years of pension freedoms, she bemoaned the lack of modernisation of products and thinking to help customers make the most of their freedoms.
However, I would argue that it is not ten years but 30 years of limited creativity and innovation by most providers of income drawdown and latterly freedoms. The levels of support provided to customers, both at outset and throughout their retirement journey, has in many cases been woeful.
A couple of weeks ago I read about Pension Pay, a platform “dedicated to transforming how pensions are accessed”. It had introduced a debit card or digital wallet to enable pensioners to access their pension savings. Highly commendable, but why have we waited 30 years for technology that has existed in the banking sector for years.
There are other examples where customer support has been sadly lacking. There is a lot of talk about educating pensioners on longevity and there is a basic tool on the ONS website for estimating average life expectancy.
I would argue that it is not ten years but thirty years of limited creativity and innovation
But where are the tools, for example, for couples to assess the likelihood of one partner outliving another by several years? Perhaps even more importantly, where are the estimates for healthy and unhealthy life expectancy — absolutely crucial in retirement planning when care costs need to be factored in.
I know there are some enlightened providers that are pushing back the boundaries through use of technology, but they are the exception rather than the rule.
Providers will no doubt argue that regulation has been a big barrier to innovation, and there is undoubtedly some truth in this.
However, there does seem to be a slight wind of change blowing on the regulatory front. The FCA’s discussion paper DP24/3 — Pensions: Adapting our requirements for a changing market — had some encouraging suggestions around the use of modellers and tools.
Feedback had to be provided by the end of February, but here we are over five months later and none the wiser as to what may change.
I believe that for far too long providers and particularly investment managers have focused on investment solutions, ignoring the many other challenges facing investors trying to cope with the “hardest problem in finance”.
Technology, combined with a real focus on their needs, can provide practical solutions for the millions in, at or approaching retirement
My comments mainly relate to the growing number of non-advised pensioners. In a SIPP market report I published last year, I estimated that of the five million SIPPs in existence, around two-thirds were operated on a non-advised basis, and over 85% of SIPP investors had not yet vested their benefits. I’m currently updating that report and fully expect both of those percentages to have risen.
The FCA’s recent proposals on targeted support (CP 25/17) had the staggering and very alarming research finding that 34% of those aged 50-69 with a DC pension had never heard of income drawdown! Just as worrying was the statistic that only 9% of those researched had received regulated advice in the last 12 months.
The targeted support and simplified advice proposals may go some way to addressing these and similar issues, but they are still months away from enactment. It may be that workplace pensions will be the catalyst for more dramatic action, given the guided retirement proposals in the Pensions Bill. But again, these are probably at least two years away.
But there is no need to wait for legislation. Technology, combined with a real focus on their needs, can provide practical solutions for the millions in, at or approaching retirement.
The SIPP market alone has around nearly £500bn of unvested funds. That’s a huge prize for the providers and others who meet the challenge of providing useful and efficient support and guidance for those who are grappling with the ‘nasty’ problem.
John Moret is principal of MoretoSIPPs
