DrawdownApr 11 2018

Industry attacks MPs' default drawdown plan

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Industry attacks MPs' default drawdown plan

Advisers and providers have attacked MPs’ plans to create a default drawdown product and allow government-backed Nest to provide it, saying the move breaks with the spirit of pension freedoms.

The influential work and pensions select committee last week (5 April) called for a new form of standardised drawdown - where retirees take an income from their nest egg while remaining invested to boost returns - for consumers allowed to buy the product by the pension freedom reforms but unwilling or unable to choose their own investments. 

Under the plans, all drawdown providers would be forced to offer the product and Nest, the workplace pension scheme backed by the government, would be allowed to sell drawdown for the first time.

But the plans did not bode well with providers who have been fiercely critical of any form of standardised drawdown, saying the product’s inherent complexity would not allow for a suitable one-size-fits-all solution.

They also attacked plans to bring Nest into the mix, citing competition issues and an unfair financial advantage because the pension provider is government backed to the tune of £500m - and expected to increase to more £1bn in future.

The idea behind default drawdown was to mirror the positive effects of auto-enrolment in accumulation for those entering decumulation.

But Royal London’s director of policy, Steve Webb, who was the architect of auto-enrolment and was pensions minister when the pension reform was implemented, said the plans would “destroy the spirit of pension freedoms”.

“To put people into defaults at retirement is to fundamentally misunderstand the diversity of individual and household circumstance.”

He also attacked the proposed 0.75 per cent charge cap for the product, which he called an ‘off-the-shelf’ number drawn from workplace pensions.

He said: “Auto enrolment workplace pensions are being provided at an industrial scale to 9 million people, whereas the nature and scale of the drawdown market is totally different, you can’t just ‘cut and paste’ a cap from one product and assume it fits another.”

Andrew Tully, pensions technical director at Retirement Advantage, said there was “plenty of choice” available in the market which could serve a similar purpose, such as risk targeted funds, risk rated funds and governed model portfolios.

Allowing Nest to compete freely “feels to me like mission creep,” he said.

The providers argued there was not enough of a ‘market failure’ to warrant a government intervention which was akin to auto enrolment, when Nest was created to cater for those providers were expected to shun.

But others suggested the providers had their own commercial interests at heart.

Chris Wagstaff, head of pensions and investment education at Columbia Threadneedle, has previously called for a default solution for the non-advised mass market, based on diversified multi-asset portfolios.

He said: “I would imagine the drawdown market is incredibly profitable and the idea to have something [with a] charge cap and perhaps more regulated than we have at the moment eats into profits quite considerably.”

But Tom Selby, senior analyst at AJ Bell, said the key problem with default drawdown is customer suitability, not commercial considerations.

"The charge cap is not an issue. We have plenty of passive fund options on our platform, including our own, which combined with our platform charge would be under the charge cap.

"The issue is that it is difficult to see how a default drawdown solution can possibly be suitable for all consumers given the wide range of personal circumstances and needs.”

Advisers largely sympathised with the providers’ concerns, saying better access to advice was the key to a functioning drawdown market.

“Having a default option is likely to be counterproductive and lead to poorer outcomes as people would then not be encouraged to take valuable financial advice at a crucial life stage,” said Scott Gallacher, director at Rowley Turton Private Wealth Management.

But Paul Stocks, financial services director at Dobson and Hodge, saw potential benefits in having standardised drawdown indicators.

“Having a ‘benchmark’ a la government actual rates could help members benefit from drawdown whilst understanding whether they are perhaps taking higher than feasible income levels,” he said.

David Hearne, wealth management adviser at Satis Asset Management, said the MPs’ focus on cost in introducing a charging cap was misplaced.

“It’s about whether the public realise the importance of planning, which I fear is less likely if government focus is on cost,” he said.

But Dave Penny, managing director at Invest Southwest, saw potential market benefits in creating a low cost drawdown option.

He pointed to similarities with the provider upheaval around stakeholder pensions in the past which brought “into sharp relief the charging within pensions”. 

“This suggested charge cap on a default drawdown option may do the same for the decumulation phase,” he said.

carmen.reichman@ft.com