Employers and trustees are resisting implementing the new pension flexibilities, whether through apathy, fear of being treated as having given advice or concern at refuelling the pension timebomb. John Lappin reports
Early signs of the impact of the 2014 Budget changes point to a mismatch between what the public thinks it can have and what employers and trustees are giving it. While market innovation and development may ultimately deliver to consumers exactly the freedom the Chancellor promised them, employers and trustees are resistant to implementing flexibility that risks resetting the pensions timebomb.
That was the view of delegates at the recent Corporate Adviser/Royal London round table, ‘Freedom and Choice: Workplace Pensions in the New World’. They argued that further regulatory reform, product and proposition development is urgently needed to make the most of the new rules and avoid bad member outcomes.
How the industry and regulators react to the changes will depend on the way consumers behave. Royal London business development manager Jamie Clark set the scene with details of early signs of behaviour among those who have already accessed their retirement cash. Royal London has been asking withdrawing customers what they plan to spend their money on. So far, 35 per cent intend to pay off their debts, 22 per cent are going to spend it on a new conservatory or home improvements, 15 per cent intend to invest in something like an Isa or property, while 11 per cent plan to buy a car or caravan. A further 11 per cent will use the money for general living expenses – which, he said, was arguably an indictment of pensioner poverty – and 6 per cent said they would spend it on a holiday.
“Only very few are going to blow it all and the rest are looking more long term,” said Clark. “Those who called us had relatively modest fund values and once we explained the overall tax position, especially on emergency tax, they thought twice about taking the money out.”
Intermediary delegates said the attitude of employers to the new freedoms had so far been a mixture of resistance and apathy.
Jelf Employee Benefits head of benefits strategy Steve Herbert said: “For my client base of SMEs from 50 to a couple of thousand, generally employers have done absolutely nothing. We asked them in February about who had warned their employees about actual scams and only 1 per cent had done so. There has been very little action.”
Barnett Waddingham associate Phil Duly said: “All the employers we speak to have done is think about communications. The experience to date has been employees wishing to cash out. The occasional employee wishes to access flexi drawdown without advice. Not all providers are in a position yet to offer this ‘without advice’ route. There is confusion among employees, but also disappointment because they have read about all these freedoms, but they have not always got access to them through the arrangements they are in.”
Towers Watson senior consultant Rudi Smith said: “From our own experience, there are a lot of calls from people who have defined benefit pensions and can’t get direct access, or are too young, or think the flexibilities apply automatically, but don’t realise there is a responsibility through the scheme to consider whether they should allow it.”
Punter Southall principal for DC consulting Neil Latham sees a lot of apathy among employers. He said: “The employers I am speaking to say: ‘We know we have to tell our staff but it’s not desperately urgent’. They are not getting a lot of calls to the HR team, asking ‘how do I do this?’. It is not the burning number-one issue.”
Hugh Nolan, regional director at JLT Benefit Solutions, thinks employers are being put off engaging with the reforms because they are scared of being responsible for saying the wrong thing. He says: “Employers and trustees are quite worried about talking to their employees. They are worried they might get caught out giving financial advice or encouraging something they might be sued for at a later date.
“We have seen a handful of employers with DB schemes seeing an opportunity to cash people out. The ETV exercise is slightly more fashionable, despite the FCA TPR objection. It is back on the radar for all levels of plot. It is only a handful, but they are keen to cash out their liability at transfer value levels, even if they are more generous – particularly those who are looking to wind up the scheme in the near future.”
Glynn Jones, divisional director of group savings and investments at LEBC, said there had been uncertainty among employers because the reforms came in just prior to an election. “Now we will start to see people saying ‘this is what we are going to do’. We have seen interest from DB schemes in terms of communicating that this is what is happening in the world – this is the transfer value,” he said. “Perhaps it doesn’t need to be enhanced but perhaps just full value. Just to say ‘this is what you can do’. As trustees, there is a responsibility to communicate that this is what is available.”
Delegates were concerned that easy access could build up future HR problems as older staff who are no longer wanted find themselves too poor to retire.
Jones argued that the short-term cash carrot might help to get some people off the books. But Latham said: “Could it be the reverse? People spend money while in work, deplete their savings and then continue to work longer than their employer may wish them to.”
Herbert questioned whether all those who said they were planning to reinvest would end up doing so once the cash was in their account. He said: “It looks like plenty of people are going to blow their cash. ‘Reinvesting’ is an interesting way of saying they will buy a caravan or a car. With big fund values, it is a different thing.”
Smith flagged up the extent to which this is a real issue for employers. “There is an employer fear about individuals blowing their cash, but where employees have discussed this, it hasn’t translated into providing an advisory service. There is a gap now,” he said. “There is a pressure to do extra for these people.”
When it comes to trustee attitudes to the freedoms, consultants and advisers reported that they are in no hurry to offer any more flexibility than they have to. Innovation was likely to emerge – but not just yet.
Nolan said it might not be full flexibility but may involve schemes offering a single payment, and also meeting the minimum legislative requirement, so either an annuity or transfer.
Duly said: “With auto-enrolment, someone could transfer and immediately opt in again and build up further pension savings. I think trust based schemes will allow some multiple payments but will have restrictions in there.”
Smith said he was not convinced trustees will want to offer more than one or two payments. And where individuals exercise their right to transfer out and then rejoin the scheme, they could find themselves being re-enrolled into an inferior offering, possibly with lower contributions. “Even with AE, a lot of trust based schemes offer much better benefit than AE, so if you put it across the right way you are telling people they are coming back in on a completely different benefit from the one they left on. I also see a lot of trustees who are very conservative in their approaches.”
Scams and fraud were seen as another reason for trustees to put the brakes on access.
Nolan said: “Many trustees are not interested in extending the cost of the scheme to give people more flexibility. They don’t think flexibility is good for members – they may blow it or get scammed, but they may think that is not our problem, though we will warn them about the possibility.”
Latham said: “It feels as though trustees will curb the excesses of flexibilities because the scheme is there to provide retirement income, not all these lump sums.” He said there was a stark contrast with the provider, contract-based market, where money and resources have been spent on ensuring that access can be delivered.
But Herbert pointed out that not offering flexibility could ultimately backfire because one of the aims of offering a scheme was to make it attractive to employees. This competitive pressure on schemes would force product development, he argued, with master trusts offering a possible way forward.
Nolan said: “The decumulation trust arrangement is what we are seeing happening in the market, though smaller employer trusts may say you must transfer at this point, rather than doing it here. They may not be employees by then”.
Latham also suggested that divorce and other hard-luck cases might be allowed by trustees to access their cash. He said: “Most are conscious that it has taken years to build up the pension, but there will be a desperate-man scenario. They will pay for their divorces. But you may undermine what an employer is doing the pension for. If it just becomes ‘paying the AE minimum’, it may just become pay. These pots will never be big enough.”
Smith said master trusts such as The People’s Pension and Now: Pensions would devise policies with their independent boards, but smaller trusts would worry about members doing something not in their interests and this reflecting badly on them.
Latham said he thought regulation would be introduced to curb some of the wilder excesses and encourage more responsible access.
Herbert said: “Real savers, ordinary Joes in the street, still think they can just have it as a bank account, regardless. There is a massive mismatch between what they think has been said and what is going to happen.”
Duly added: “The more they treat it as a bank account, and the more technology comes in, maybe the more conservative they are going to get with investment choices. You don’t like seeing your bank account run down.”
Latham argued that people would probably take their annuities later in life and spend some cash up front. However, considering second line of defence and the fact that people were saying they had spoken to Pension Wise when possibly they had not, he wondered if safeguards are illusory.
But delegates agreed that the freedoms increase the pensions timebomb of people approaching retirement without enough to live on.
Herbert said: “In my view, absolutely, even if some people make the right decisions, a lot of people will make the wrong decisions. By virtue of the numbers, it will increase the problem”.
Delegates agreed the reforms have not addressed the oft-quoted behavioural bias of hyperbolic discounting – the propensity of humans to value £1 today more than £1 in the future.
“If you are a Joe Bloggs saver, if someone offers you £100,000 or £5,000 income, you will take the cash,” said Herbert.
Latham added: “Evolution hasn’t equipped us to make complex financial decisions over 20-year
periods. It is more about food on the table tomorrow.”
If there is to be food on pensioners’ tables for years to come, the industry will have to develop structures that take these behavioural biases fully into account.