Andy Manson, Principal Advisor, KPMGAndy Manson will discuss Freedom vs Responsibility in the Retirement Market at the ABI Transforming Long-Term Savings Conference on 19 April 2016. He signposts some of the issues that will be discussed at the session.
In the world of 24/7 media coverage, there’s increasing pressure for instant assessments of news and government policy. It’s the same with pension freedoms: people want rapid appraisals of what their impact has been and whether they’re a success. It’s too early to do this, of course. The freedoms are part of a long-term agenda to transfer financial responsibility from the state to the individual, and it will take years to truly assess their impact.
In the short term, they have generated some welcome developments. Principally, they have stimulated interest in pensions, and persuaded more people to think about long-term saving. This can only be a good thing. But the freedoms have also created valid concerns.
Above all, it is unclear whether people really understand their new responsibilities. And before we can proclaim the freedoms a success, more work is necessary to ensure that consumers are saving enough and that they are making sound decisions with the right amount of help as they transition into retirement.
Making the right decisions
I use the word ‘help’ deliberately. Rather than fixating on advice and the nuances of regulatory definitions, industry and regulators need to address a bigger issue: how we help people to make the right decisions about savings and retirement.
For this to happen, three aspects need to come together.
First, we must improve general financial capability. This is a long-term issue, and we should be realistic about how quickly we can make a material difference here. But the size of the task is not a reason to shelve it.
Second, we need to simplify the offering to the consumer – making it easier for customers to get it right, and, where appropriate, finding ways to nudge customers towards the right answer.
Third, we need to provide help at the right time to make sure people make the right big decisions. On this last point, I am disappointed with the initial outcome of the Financial Advice Market Review (FAMR).
It is a useful list of what needs to be done. But given the hype, it is a shame we have not seen more immediate ideas to improve the provision of guidance, simple advice and workplace models. Instead, we are again left with the question of whether the regulator and industry can come together to solve these well-understood problems.
The nub of it all
Coming back to the question of whether people are saving enough in the first place: this is surely the real key as to whether the freedoms end up a success. It is vital that we have a stable policy landscape – a landscape in which the industry can plan strategically and consumers understand their choices and responsibilities.
It is in this context that the government’s recent U-turn on pensions tax relief – leading to the launch of the Lifetime ISA (LISA) – has frustrated many people.
In itself, the LISA has merit. But launching it into the current product regime simply increases the complexity of choices for savers and does nothing to address the challenges where individuals choose not to save. I fear that this will make many people’s savings decisions even harder at a time when we haven’t solved the underlying issues of capability and advice with the potential to undermine progress made on auto-enrolment.
The LISA alone clearly fails to meet the Chancellor’s stated criteria for the review of tax relief. Given his challenges in reining in public spending elsewhere, it seems inevitable that the Treasury will look at this again and we will have another cycle of reform and uncertainty.
Far from the policy stability and transparency needed to address the widening savings gap, we have a continuation of tactical policy-making and a potential shift to tax, exempt, exempt (TEE) treatment by stealth.
Judgments about the long-term impacts of pension freedoms, and the new responsibilities they bring, are premature. But in the meantime, they offer us plenty to talk about – from the latest figures on drawdowns and annuities, to the market’s innovations around robo-advice, aggregation and workplace solutions.
I look forward to hearing your take on 19 April.
Andy Manson is Principal Advisor at KPMG