What people don’t appreciate is that there are myriad changes currently taking place in the pensions industry and the impact of these will be felt decades down the line.
The outcomes matter. Being old and poor is not fun.
Since 2015 Phoenix has worked with The Pensions Institute to assess and forecast what all the changes taking place will mean for the industry, for people saving for their retirement and for future generations who might have to fund shortfalls when retirees run out of savings.
Our view is that while UK prudential regulation may be causing difficulties for life companies, its evolution is broadly in line with other developed nations.
The Solvency II regime was introduced in 2016 and, through placing a far greater burden on those writing risk-based business, has proved to be a catalyst for change in the UK life industry.
The stark reality is that if we continue on our current trajectory, the retirement journey will turn out to be a rough one for many people.The industry is splitting into two, with one group of companies retaining the traditional risk-based model, while another has moved into a less capital-intensive asset management structure.
You can see this with our recently announced purchase of Standard Life Aberdeen’s life insurance business – a transaction that is accelerating the strategic reshaping of the UK life insurance landscape.
However, on the regulation of the retail market, it’s far from clear that the approach being taken in the UK is the right one.
We are now in the fourth year since the government introduced pension freedom reforms. The number of people making use of the pension freedoms has soared to record levels in 2018, with 222,000 pensioners making half a million withdrawals from their pension pots in the spring of 2018 alone – 20,000 more than the last quarter of 2017.
Separately, auto-enrolment rates have recently increased to a minimum of 5 per cent of earnings (3 per cent from the individual and 2 per cent from the employer) with 9.5 million participants since 2012. The latter is an extraordinary success.
Together, these policies give conflicting signals: from the encouragement to save for retirement (via auto-enrolment) on the one hand, and on the other, the freedom to withdraw funds from age 55 with no obligation to secure a life-long income, which could leave some at risk of running out of funds.
And the one key source of secure retirement income, the annuities market – under pressure from low interest rates due to historically low gilt rates as a consequence of quantitative easing – has been severely set back by policies designed to generate tax receipts for the Exchequer.
There’s also another issue: at present there is a dearth of new products that offer both flexibility and guaranteed income, possibly fuelling a crisis of provision and consumer protection within the retirement income market.
The stark reality is that if we continue on our current trajectory, the retirement journey will turn out to be a rough one for many people, and those that may have to fill the income gap – the young and in work – may resent funding, via taxes, the deficit.
So how does the industry, regulators and government work together to ensure we are not heading for a retirement crisis in the future?
Those firms active in the market need to work much harder for consumers to ensure that they are getting optimal outcomes.
The government needs to coordinate regulation better to avoid the efficacy of the pensions system to protect individuals from old age poverty being undermined by short-term needs to raise tax revenues.
And the retirement income market must work with government and employers to find a better deal for consumers through empowering solutions and greater incentives.
Ultimately, the UK needs a coherent approach to the long-term savings conundrum to avoid the state having to bail out those who outlive their pension assets.
Otherwise, we face damage to future intergenerational solidarity.
Clive Bannister is chief executive of Phoenix Group
