OpinionDec 8 2014

Industry must wrestle with drawdown vs annuities

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Rush pensions legislation and repent at leisure should probably be a warning for all British legislators.

When I interviewed Aegon’s pension guru Stewart Ritchie in 2008, he suggested a clause in the original personal pension legislation allowing parallel company and personal pensions would have drastically cut pensions mis-selling.

History might well have been very different if such a clause had been added.

I am willing to be challenged, but within the regulated sector, mis-selling in the midst of such a reform ought to be quite difficult

So it was a little bit concerning when Labour warned at parliament’s bill committee that the addition of 33 new clauses and 72 amendments by the government meant MPs couldn’t scrutinise the new legislation properly. Labour says this risks raising the chances of mis-selling.

And yet, this time out, is it really possible that mis-selling – in the familiar forms we know it as – will raise its ugly head? The intention of the reform is crystal clear. It offers a huge amount of pension income freedom.

I am willing to be challenged, but within the regulated sector, mis-selling in the midst of such a reform ought to be quite difficult.

Drawdown, as annuities expert Billy Burrows has suggested to me in the last few weeks, is likely to become something of a default option for lots of investors.

So while the application of advice, suitability and the rest of advisers’ toolkits surely remains the same, what is worrying for the sector is a lack of a substantially settled opinion about drawdown-versus-annuities in light of the new reforms.

We are hearing arguments about what minimums are appropriate and a debate about charging. There’s also concerns surrounding more scholarly, technical issues, such as stochastic modelling and the assumptions used to direct people to drawdown, with eValue strategy director Bruce Moss discussing the merits of mean variance/co-variance models versus economic scenario generators.

But that is clearly beyond the ken of most investors – and many consumer journalists, too – although agreed industry standards would surely be very helpful.

Yet other issues are hogging the headlines in the meantime.

The arguments and possibility of redress for those with health conditions sold an annuity without an enhancement from their insurer is the financial topic of the moment.

The fact that people can do just about anything with their money, and that all manner of unwise investments may effectively be brought in from the cold, is surely the next big issue.

A market crash in the next year or two would be pretty horrific for a lot of people if they stayed invested in drawdown. But it is nothing compared with putting all their pension money in what you might call a ‘get poor quick’ scheme. Eventually, I suspect this will take up most attention when the industry, regulators and politicians review the reforms… after the election.

However, the FCA would be doing the regulated industry a fantastically valuable service if it were to give a very strong indication of what good and bad looks like in light of the new regime.

That is unless anyone can think of any clause or clauses in the legislation that would make things much safer. Time’s running out for that, though.

John Lappin blogs on industry issues at www.themoneydebate.co.uk