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What more can be done to help people with retirement decisions?

A bit of scrutiny is always good to help us reflect, so for the last two weekends I was pleased to see the Sunday Times calling for more to be done to help people make decisions at retirement. We agree on the essence of the problem and the direction of the solution: people need more support to make retirement decisions.

Some questions need closer scrutiny, though, and further investigation beyond the headlines. None of this changes the central point that people need to be able to access help when they need it.

First, there is an important factor the first article didn’t look at: guaranteed annuity rates. These promises embedded into contracts in the 80s and 90s pay rates of 8, 10, even up to 12%. That may have been competitive at the time but now looks incredibly generous given how far interest rates have fallen and life expectancy has risen. Our data, and past FCA data, suggests that the majority of internal annuities (that is, those bought from the same provider as they saved with) have these guarantees. So no-one should assume that staying with the same provider equates to a bad outcome. A greater concern is how many customers cash in their pension instead of claiming the guarantee. It’s their choice to do so, and providers explain the value of the guarantee. But it will rarely be in the customer’s long-term financial interest to cash it in. That fact only serves to reinforce that people need more help.

Second, let’s look more closely at the data. It was a surprise to see that the proportion of people who switch provider when buying a guaranteed income (or annuity) has not changed, because our data shows the opposite. Consistently since 2017, a slight majority of people who buy a guaranteed income buy it from a different provider to the one they saved with. The FCA’s data differs from ours – but I think that may be because the FCA asks firms to include guaranteed income benefits coming into payment which were previously held in a final salary pension but are now held with an insurer.* The ABI data set is a more consistent time series going back before pension freedoms and shows a shift from then to now. That is not to deny that more help should be available with these decisions.

Third, the articles rightly look at wider issues in the retirement market, like choosing a drawdown provider. But these issues are not the same as the guaranteed income market. Especially in the drawdown market, many customers will have shopped around and consolidated their pensions already before entering drawdown; for someone who consolidated pensions at age 50, it would not make sense to force them to choose again at, say at age 55. And unlike guaranteed income, customers can and do switch once the policy has started. So the number of people who switch at the point of taking a tax-free lump sum is not that meaningful. More customer support is still needed throughout retirement, not just at that one point. We published a blueprint for a drawdown comparison in 2017 and a guide to in-retirement communications earlier this year, and right now we’re working on a paper about withdrawal strategies. The Money and Pensions Service is developing an investment pathways tool that will help customers compare drawdown offerings as part of a wider drawdown journey.

Finally, we should reflect on the existing interventions in this market, which were supported by the industry: one-page retirement communications, and a requirement for firms to include a comparison with a market-leading rate alongside any guaranteed income quote. We should be asking why these interventions have not shifted the dial as much as might have been expected.  It’s unfair to blame consumers, saying they are “failing to shop around” – in any market, consumers are entitled to pay more for a brand of their choice, as long as the choices are made simple for them.

I suspect part of the answer is that the mandated paper communications are helpful for consumers, but returning to our starting point: people need more help. The question is how it is delivered. We agree that more people need to get advice, and that means looking afresh at the advice market and the rules that surround it. We also agree that it’s important to get more people to Pension Wise earlier than the point at which they are accessing a pension. It also means changing the rules to enable and encourage providers – who may have a relationship with the customer over many decades – to do more to help customers, not just at the fixed point of a notional retirement date, but throughout their lives.

* I don’t blame the Sunday Times for not looking at SUP16 Annex 43B Q11 in the FCA’s handbook, which sets out guidance on their data collection. But in it, the FCA asks firms to include guaranteed income benefits previously held in a DB pension, now held with an insurer, which are coming into payment. If so, they might be catching some policies which are DB pensions and not retail annuities; and if that is the case, surely it’s not a bad outcome for people to claim a DB pension. In addition, the difference between our data and FCA’s is not explained by the FCA having more providers supplying data. Of the two large insurers which are not currently ABI members, one does not sell annuities at all, and the other did participate in our collection for this data period.

 

 


Last updated 04/12/2020