If 2014 was the most significant year for pensions legislation since the introduction of the state pension in 1909, 2015 promises to be even more impactful as the reforms announced last year kick into life.
In announcing the overhaul in his March Budget speech, chancellor George Osborne initiated a scramble among providers that had apparently been given no warning of the impending changes and which now had barely 12 months to prepare for a new regulatory landscape, the details of which had not yet been finalised.
From a consumers’ point of view, the new freedoms will afford pensions savers greater access to their savings than they have ever enjoyed before. A range of solutions now come into play where previously those retiring had been restricted to annuities at uninspiring rates. Drawdown has been an option for those with significant pots, but in truth most pension pots weremore likely to be eligible for trivial commutation than income drawdown.
AnFT editorial in the immediate wake of Mr Osborne’s announcement likened the move to allow people to ‘own’ their pension to the Thatcher government allowing people the buy their council houses in the 1980s. And, it argued, the change would resonate with a similar demographic.
For all the anticipation, 2015 brings the need for action. So what is the retirement market likely to look like after April?
The immediate response – pronouncing the death of annuities – which sent several providers’ share prices tumbling in the Budget’s immediate aftermath, looks like it could be an over-reaction.
The initial excitement prompted by free access to pensions savings has since been balanced by the realisation that people also want security in their retirement.
The possibility of pension savings running out has been a widely expressed fear. Initially this manifested itself in soundbites about Lamborghinis, but towards the end of 2014, research emerged to support those worries. A Metlife survey was typical in quantifying adviser concern, finding that 77 per cent of intermediaries saw the risk of running out of money was the biggest threat to pension reforms’ success. A separate survey of consumers found 41 per cent were equally worried.
International policy think tank, the OECD also identified the risk that retirees could outlive their savings, “especially those with low wealth”. The group laid the blame for this on “insufficient financial literacy”.
Desire for security
Within the new framework, many will want a guaranteed income,so the key battle for annuities providers might be to remind people that their product can provide that.
Annuities need to overcome a reputational challenge as much as anything. Years of falling rates compounded by increasing longevity and dwindling pot sizes have made annuities seem particularly unappealing.
The poor rates on offer have been exacerbated by consumers’ refusal to embrace the open market option (OMO). For over a decade the government, regulators and trade bodies have made various attempts to encourage the public to shop around at retirement, but each drive has had, at best, limited impact. The most recent, launched by the ABI in 2013 was overshadowed by the Budget announcements before it had a chance to fail.