It is six months since the arrival of the pensions freedom and choice first promised in the 2014 Budget. Helen Swire considers what the industry has seen so far, and the implications for the coming months
“What’s done is done,” Lady Macbeth tells her husband in Shakespeare’s play, encouraging him to look to the future and not regret the decisions already made. It’s a lesson for the pensions industry, albeit one that we hope will have a happier ending than that which awaited the Scottish protagonist.
When Chancellor George Osborne announced the government decision to give retirees freedom and choice in their pension savings in the 2014 spring Budget, the pensions industry, congratulating itself on the initial success of auto-enrolment, was stopped in its tracks.
“This is the death of annuities!” screamed some headlines, while the then-pensions minister Steve Webb suggested that the changes could lead to some retirees blowing their savings pots on Lamborghinis.
These extremes aside, speculation was rife about what would happen when the change was implemented. Six months on, it is time to examine the realities, and ask what freedom and choice has really meant to individuals and the industry so far.
To buy or not to buy
So has there been a rush to the Lamborghini show room? Many industry experts say it is still too early to comment on overall trends – but one clear pattern has emerged.
“Certainly many of the providers we work with are reporting an ongoing pent-up demand for cash withdrawals,” says Debbie Falvey, DC proposition leader at Aon Hewitt.
“Is it a knee-jerk reaction or is it planned? It’s hard to be definite, but my sense is that it’s from people who would have been frustrated to have had to buy an annuity, and who see it as an opportunity to call on the money for things they need, or have been planning to do,” she adds.
Richard Butcher, managing director at PTL, agrees with this theory, suggesting the early trend is fuelled by the demand that built up between the Budget announcement and the implementation of the reforms. He says: “A lot of the activity so far has been around taking cash: however, after the Budget, there was a cohort of people who deferred retirement and waited for April so they could take the cash.”
Encouragingly, Butcher adds: “Although there are the occasional horror stories, most people seem to be doing sensible things with their money – which implies that the early trend could be people being quite sensible about accessing freedom and choice.”
Household renovations are proving popular with many retirees, while others are looking to make mortgage repayments – a far cry from the imagined splurging of entire savings pots.
A key factor to consider is that those retiring now will almost certainly have access to savings other than defined contribution pots, including (but not limited to) defined benefit funds – and so may regard the ability to withdraw from their DC savings as a useful cash fund.
This means that while there is a demand for cash now, it may not be a long-term trend, but rather choice fuelled by the reliance current retirees have on their non-DC savings.
“For people retiring now, freedom is still an operative word,” says Simon Chinnery, head of UK DC at J.P. Morgan Asset Management. “Over the next few years, choice is going to be degraded in its value. The world’s going to look very different for those people retiring predominantly or only on DC savings.”
Parting is such sweet sorrow
So were the headlines correct? In the rush for cash, are pensioners abandoning annuities for good?
Industry experts anticipate that when the first rush of retirees who wish to take cash dies down, the market will see a demand for more complex solutions. Annuity take-up is likely to remain slow while employees look at the options available to them – including drawdown – and the possibility of using a mixture of different saving solutions.
However, all is not quite lost for annuities, if the market innovates to appeal to this potential pool of buyers.
“There is still a residual interest in annuities,” says Butcher. “They provide a good guarantee – and although at the moment they represent poor value for money in the eyes of the consumer, there is still the sense that they have a place.”
Falvey agrees: “I’d like to see the deferred annuity approach, where you might use the flexibilities in the early period of retirement, but you can lock in a future income stream aged 75. It’s fundamental that people really think about the realities of their retirement.”
In short, annuities are not dead, just yet. But the face of retirement as a whole is changing. Companies will need to respond to their employees’ needs around working part time or flexibly. This, in turn, will have an impact on what people want to do with their money and their retirement.
If the annuity market can innovate to give the same certainty as before, but with a new edge of early flexibility, it might meet retirees’ demands.
“The major trend that we expect is that people will want flexibility about how they draw down their income outside of annuities,” says Chinnery.
“And then they will want income, stability around the way it’s paid and the amount they’re going to receive, and an opportunity to plan their life.”
A problem is that there are no really innovative drawdown products on the market yet – just, as Butcher puts it, “existing products that have been slightly tweaked to accommodate freedom and choice without being really creative”.
A further barrier to a long-term rush on cash is the reluctance of many occupational and trust-based schemes to give access to the freedoms in full.
For the occupational pension schemes, many are only giving access to the uncrystallised funds pension lump sum (UFPLS), where the retiree can take some or all of their pot as a lump sum, 25% of which is tax free.
Trustee groups are still working on how they can manage the flexibilities most effectively: there is a high cost, especially when working with internal administration teams, while it is proving complex to integrate the new choices with their current processes.
“They’re keeping it very simple,” says Claire van Rees, partner in Sackers’ DC team. “There has been a lot of comment around providers not giving people enough access to the freedoms, but some of the insurance providers haven’t managed to get on board in time in terms of the rush in pushing through the legislation.”
So what will the answer be for these scheme members as they start to retire?
“The feeling among trustees is that if people want to access the flexibilities in more than a very basic way, they will have to transfer out of the scheme and go to an insurance provider,” says van Rees.
“From the perspective of trustee schemes, there are a lot of detailed questions that people need to ask, which is challenging to deal with when you have individual members with individual enquiries to deal with,” adds Falvey.
“This is the challenge, because everybody’s circumstances – and what they can and can’t do – are so different.
It was all Greek to me
Of course, whether or not schemes feel that they are equipped to answer members’ questions, there is no doubt that there will be plenty asked.
When the government dropped the freedom of choice Budget bombshell, free guidance was also promised to everyone who needed it through the government’s Pension Wise service.
At the time, concerns were immediately raised about its capacity; however, rumour has it that the Citizens Advice Bureaux carrying out the Pension Wise service have not been doing anywhere near as much work as they expected.
Six months in, and the Treasury has not released any information on the activity the service has seen, but the industry is awash with gossip about the usage of Pension Wise – or the lack of it.
Suggestions for reasons behind this include: not as many people as expected are retiring; that Pension Wise lacked publicity in the run-up to the election; that people are simply making their own decisions; or that they fear picking up the phone, thinking they will just ask ‘stupid’ questions.
Whatever the reason, which may not become clear for some months, Pension Wise is surely at the very least an essential safety net.
“People will want personalised advice – but Pension Wise is supporting the need as much as possible, and they can genuinely help and support the people who are getting in touch,” says J. P. Morgan’s Chinnery.
“There is no such thing as a stupid question, and Pension Wise can help people get to a point where they can see their options clearly,” he adds.
However, the question of capacity has not gone away, nor has what would happen if every single person who retires each year actually did pick up the phone to Pension Wise.
Listen to many, speak to a few
Pension Wise, however, is not alone in providing support and guidance. Over the past six months it has become clear that some providers have stepped into the shoes of educators while others have realised that advice must now become part of their role.
Insurance companies running DC packages have, in general, begun offering comprehensive at-retirement support, while companies such as Aon Hewitt say they have seen a renewed increase in the demand for their pre-retirement seminar work.
Meanwhile, the increasing advice gap has created a huge opportunity for the adviser market to move into this space in a more creative and engaging way.
So what about the trustees and employers? Now is the time for them to act in helping, or at the very least signposting, their employees.
Sackers’ van Rees suggests that the speed at which the legislation came in will have led to hasty compliance decisions. Trustees, she argues, should now be reviewing their at-retirement communications to make sure they are not only compliant, but also clear and helpful – and make any risk as comprehensible as possible.
Although employers must consider the costs and risks of education and advice, it is they who will now play a key role for their staff members.
“It would be really helpful for employers to conduct education early on,” says Aon Hewitt’s Falvey. “There are two things for employees to consider: what is the relevant and appropriate income stream to take, but also what your investment strategy should be. Employers should at least get their over-50s to think through what their choices are.”
Falvey, like many in the industry, champions modelling tools for employees to examine their various options, aggregating both their pensions and any other financial assets they may have, to see what the impact of their choices is.
The growth of financial wellness programmes is also contributing to the role employers can play in helping and educating their workforces.
“Engaging people about looking at their future and plan for life events, and giving them the support if needed is the best that an employer can do,” says Chinnery. “They need to help their staff get retirement ready.”
Better three hours too soon…
And what happens if employees don’t get this support?
If anything is too early to pass comment on, it is whether people are making the right scheme and investment choices with the powers offered by the new freedoms.
Quite simply, it will not be known for many years down the line if retiring employees are making the right choices. If the experts are correct in their assumption that the first trend is an initial surge for cash, then we can at least expect to see a more settled period of decision-making from 2016 – showing more stable and long-term trends.
What is clear, however, is that the industry will need to focus on making sure everyone realises the importance of making the right choices.
“We also need to look at what is ‘adequate’ for people, as a lot of auto-enrolment funds will fall very short of what people consider adequate for their retirement,” argues Chinnery.
“People are on the whole sensible, but they feel very confused by all the changes – so any help they are given is a good start.”
Tomorrow and tomorrow and tomorrow
Without the right help, employees’ choices could affect them far into the future. “It’s a slow-burning problem,” warns van Rees. “The long-term consequences will be the big problem if people realise they don’t have enough money.”
However, it seems that the current trend of taking cash is only likely to be a short-term one, and there are encouraging signs of sensible decision-making.
“What people are doing now is not necessarily an indicator for the future,” says Chinnery. “But it already shows people want flexibility around their income. And they will look to their employers to provide advice. We cannot give up on engagement.”
It is fitting to end on a more positive note than a resignation to the situation worthy of Macbeth.
Perhaps employers and employees alike should be encouraged that there is a world of choice ahead – but there is still work to be done to take best advantage of this freedom.
As Brutus spurs on Cassius in Julius Caesar: “There is a tide in the affairs of men, which taken at the flood, leads on to fortune... we must take the current when it serves, or lose our ventures.”
Perhaps the Bard should have tried his hand at pensions advice…