Retirement – a dream featuring a rose-covered cottage or the nightmare of old-age penury? That is the consumer pension provision dichotomy. And there is an equivalent hope and fear for advisers and the pension industry as they balance fast-changing client needs against the model that has served them well in the past.
Retirement is a hot topic, albeit on a slow burn. And with the post-war baby boomers increasingly considering their future, the one-time emphasis on accumulation – building up pension pots – is now joined, or even surpassed, by decumulation, turning pension savings into future incomes. Against this background Financial Adviser, in conjunction with Aegon and James Hay Partnership, invited a panel of pensions experts to discuss with an adviser audience issues ranging from open market option annuities to the complexities of Sipps versus Ssas.
Pots
Hargreaves Lansdown’s head of pensions research Tom McPhail said that the decumulation of existing pension pots is the biggest challenge currently facing the industry.
He said: “It is the at-retirement space that should draw our attention. There are huge sums involved – at Hargreaves Lansdown alone we expect to handle some £35bn this year – and these amounts are growing. The baby boomer generation is retiring with 800,000 [people]a year needing to cash in their pensions in some way. And while in previous decades most retirees would have claimed on DB plans, we now see the maturing of many of those defined-contribution policies taken out in the 1980s. We can no longer, as we once could, expect clients to be in defined benefit plans. From a peak of 12m members in 1967, these plans are essentially in run-off, with the abolition of contracting out in 2016 likely to prove their final death.”
He warned against expecting an easy ride from DC clients. “For the industry, it’s a given that most have not done enough. But it’s been difficult to encourage pensions savings against the social memory of mis-selling, Equitable Life, stockmarket crashes and falling annuity rates.”
He added: “People are disenchanted. Some 80 per cent of pension pots are under £50,000 with a large proportion of these under £10,000. Advisers have to add this to concerns that retirement, once a ‘gold watch’ occasion, has become increasingly messy. They don’t retire when they think they will. There are Isas, mortgages including interest-only, and health issues to consider as well as part-retirement.”
Mr McPhail said that one area where advisers could be positive is in encouraging the shopping around of annuities. Those retiring with DC pots have been told about this since 2002, but more than 50 per cent fail to survey the market.
“In most cases, the pensions provider deal is not the best. At The Pensions Income Choice Association, we want shopping around to be the default. But it could not be made to work so we have the ABI Code of Conduct, not perfect but a substantial step in the right direction. The good news is that the Financial Conduct Authority has become interested in annuity provision. Why do only 4 per cent of those going direct to their pension provider get an enhanced annuity? It should be more like 50 per cent to 60 per cent. And Tesco is moving into the annuity space.”
With so many moving into decumulation “it would be nice to give advice,” said Mr McPhail “but the market capacity is not there. I question if most need advice. At Hargreaves Lansdown, clients are mostly non-advised but the majority want some interaction, some guidance. The annuity transaction will become increasingly commoditised.”
Issues to resolve include the use of technology to accelerate the process, the lack of innovation, and whether advisers adopt a mass-market model or move upmarket.
Upmarket is where Ian Linden, the technical manager (pensions) at James Hay Associates, is mostly focused on. He saw “a fair uptick in Ssas enquiries in the past 18 months with many converting from Sipps. It is a fragmented market worth £16bn with more than 40 providers. The smallest literally run a handful of schemes – the biggest £2.7bn.”
The ability to use a Ssas as a source of small company loan finance in the current difficult climate may partly explain the surge in interest.
But Mr Linden said members of these plans have to be careful. “This product is not regulated by the FCA but by the pensions regulator and, as there is a 12-member limit, few outside the scheme are ever aware when something goes wrong. The legal situation is quite different to a Sipp, which is a personal and not an occupational pension scheme.”
Advisers looking at moving clients to Ssas need to stress the legal background.
Mr Linden said: “These plans are established by sponsoring employers, which tend to be small, often family-run companies. Normally, all members are trustees. This status exempts them from many regulations so they can buy shares in their own company and loan back assets. But there are downsides. Trustees have a duty to follow best practice; they have personal liability, so the need to know what they can and can’t do, avoiding conflicts between their role as company directors/execs and as pension fund trustees. There is no requirement to have a professional scheme administrator.”
He warned that this comparative lack of regulation could make the plans targets for unlocking companies.
Trustee
IFA Steve Osbiston of Surreybased Michael Robinson Associates asked about the 2006 abolition of the requirement to have pensioneer trustees. “Where should the liability now lie?” he asked.
Mr Linden answered. “A lot of providers have quit this part of the business. There are many Ssases without a professional administrator or trustee. As long as professionals offer guidance the legal argument over responsibility is defused.”
However speaker Yvonne Braun, head of savings, retirement and social care at the Association of British Insurers, was more upbeat than Mr McPhail over the ABI Code of Conduct on Retirement Choices, but admitted there was progress needed. She said: “The annuity purchase is being transformed. From March, firms have had to send out shopping-around information six months before the stated retirement date, and while it is early our anecdotal evidence is that this makes a difference to customers. And from the summer, we’ll publish rates from all providers.”
Ms Braun saw “more choice” with enhanced annuities from Scottish Widows and Friends Life and more intermediaries “with Tesco the most spectacular”. But caution was needed to “ensure no one ends up with the wrong product”.
Chris Boylan of Chris Boylan IFA wondered if the abolition of contracting out and its replacement as government policy with auto-enrolment was not a mistake.
Ms Braun responded: “Auto-enrolment says that a pension is a good thing in a way contracting out could not. You can’t rely on people to do the right thing but there is strong evidence that the employer contribution makes people save. Employees trust their bosses more than politicians or advisers.”
She questioned media versions of “£2bn lost a year” from wrong annuity purchases and while she supports the FCA thematic review into annuities (which will look at the harm to consumers of not shopping around), she wondered “how the FCA will capture the methodology of big pots that are far more likely to shop around”.
Where does this leave advisers in a mass market where, post RDR, fewer transactions are advised?
“There are barriers to discussing retirement. The adviser community has a huge task to explain here. And they need to open people’s eyes to the increasing chances of living to 100 – there is a need for regulated advice on long-term care, equity release and pre-funded care. Consumers need to engage earlier in these decisions. Advisers need to be aware that later-life planning can be a horrible topic.”
The need for advisers to be aware of demographic pressure and changing lifestyles was the theme of Martin Coyle, head of platform sales at Aegon. He said that the Aegon platform now captured accumulation and decumulation both in and out of the workplace.
“In 1917, the King sent out 22 telegrams to celebrate 100th birthdays. In 1952, the Queen dispatched 255 greetings. In 2011, she sent 2,500 but whoever is on the throne in 2035 is likely to post a mass market 110,000. And that’s before some of the baby boomers reach their century from 2045 onwards. The post-war generation has benefited from the stockmarket, secure employment, final-salary pensions and the house price boom. According to JP Morgan research last year, 81 per cent of those with a joint income of at least £50,000 would seek professional financial advice. So retirement planning is the big thing for advice, presenting huge opportunities.”
But accumulation/decumulation advice is not so easy. The image, which Mr Coyle still sees, of a retired man in a cardigan at the bowls club is now unrealistic as people no longer view retirement as a one-off event.
“They are just as likely to walk in the Himalayas or ride a Harley-Davidson. The retirement cliff – the big fall from work to non-work – is fast becoming a thing of the past. The rigid accumulate and then decumulate is being replaced by variety – continuing employment, part-time self-employment use of non-pension tax wrappers – all to support dreams and aspirations.”
Shabbir Razvi, managing director of International Finance Solutions Associates in London, questioned if professional advisers were really advising or if clients will find it just as helpful to chat with their taxi drivers.
Mr Coyle responded by reiterating that trust has to underpin relationships and one way might be to follow the more holistic financial planning model in his native Australia.
Mr Coyle said that as the number of clients and sums involved increases, advisers will have to rely more on technology to deliver a consistent and rapid message to clients.
“Look at the numbers. Two-thirds of the 55 to 64 age group are online every day. Nearly a third of the over 65s log on daily. And these numbers can only grow. If you are not in clients’ digital lives, then maybe you are not in their lives at all.”
Tony Levene is a freelance journalist
Key points
■ Open-market option for annuities will be boosted when the ABI publishes rates for all providers this summer.
■ Basic decumulation is more likely to be delivered via technology and less through advice.
■ Increasing longevity moves the advice goalposts to later-life planning from IFAs
The panel
Tom McPhail is head of pensions research at Hargreaves Lansdown. He has 27 years’ experience in the financial services industry, where he has worked in sales and marketing and as a specialist pensions IFA. Since 2002 Mr McPhail has been the lead spokesman on pensions-related issues at Hargreaves Lansdown. He is also a governor of the Pensions Policy Institute, sits on the retirement council for the Financial Services Forum and, since 2009, has been chairman of the Pensions Income Choice Association, leading their campaign for reform of the Open Market Option.
Ian Linden is technical manager, pensions, at James Hay Partnership. He has been involved in financial services for more than 20 years, spending the early years as an IFA. He subsequently moved into consultancy with asset management companies and IFAs. After completing an MBA, he held business development roles with a number of specialist pension providers. As well as his MBA, Mr Linden holds the Diploma in Financial Planning from the Chartered Insurance Institute and the Retirement Provision Certificate from the Pension Management Institute.
Yvonne Braun is head of savings, retirement and social care at the Association of British Insurers. She has extensive experience in financial services, as a practitioner, policymaker and lobbyist. Ms Braun managed international capital market transactions at Goldman Sachs before working in policy and public affairs at the FSA. Prior to taking over the pensions and social care brief, she led the ABI’s Solvency II and retail conduct work. Yvonne is a graduate of Cambridge University and is qualified as a lawyer in both Germany and England.
Martin Coyle is head of platform sales at Aegon. He has been in financial services since 1991. Mr Coyle’s career began with MLC, which later became the wealth management arm of National Australia Bank. Seeking pastures new, he arrived in the UK in 2005 where he has held consultancy and business development positions with Prudential and Axa Wealth before recently joining Aegon UK. Following completion of a Diploma of Financial Markets and a Diploma of Financial Planning, Mr Coyle qualified for Australian Certified Financial Planner status.