On the go: Inadequate retirement incomes that do not meet consumers’ expectations remain the central challenge for the pensions industry, according to the Financial Conduct Authority.
The regulator’s sector views, published Thursday, cited low pension contribution rates – of less than 6 per cent of salary – pension scams, poor value, and unsuitable products among the contributing factors to this threat.
Poor retirement outcomes are not helped by the fact that just 52 per cent of UK adults with a defined contribution pension have read their annual pension statements.
For all the recent successes of auto-enrolment and pension freedoms, investors still face significant risks in saving for retirement
Tom McPhail, Hargreaves Lansdown
When it comes to reviewing pensions, the figures are even lower, with the study pointing out that only 29 per cent of UK adults with a DC pension report any awareness of the charges they pay, while just 18 per cent of UK adults have reviewed where their pension is invested since joining.
Rise of master trusts
One of the most significant trends highlighted in the report was the rise of master trusts, recording almost 2.8 million new members in 2017. Growth was driven by both small employers auto-enrolling their employees and larger employers switching from single-employer pensions.
Although contract-based workplace pensions attracted fewer new members, the number of new contract-based pensions actually rose slightly in 2017.
2017 saw the three biggest firms, with more than half of the 9.3 million members who currently have lifestyle pensions, all announcing design updates to align legacy products more closely with the retirement choices consumers now have, as a result of pension freedoms.
Meanwhile the debate around the potential for greater use of factor-based and environmental, social and governance-based investing in DC products intensified. However, justification for their use and the inclusion of other ‘alternative’ investments in DC remains limited, according to the FCA.
Freedoms data still concerning
Transfers out of defined benefit schemes continued to rise in 2017, and the rate of transfers grew exponentially in the period from April 2016 to September 2017, almost doubling in each 6 month period.
23,806 transfers were completed between April and September 2017, up from 5,056 cases between October 2015 and March 2016.
The impact of pension freedoms on the retirement income market has begun to stabilise. The number of drawdown purchases and full cash withdrawals rose slightly in 2017 (by 11 per cent and 6 per cent respectively), while the proportion of consumers selecting each option was broadly stable.
Around 55 per cent took full cash withdrawals, 30 per cent chose drawdown, and 10-15 per cent selected annuities in both 2016 and 2017.
A large proportion of those withdrawing cash from pension pots are choosing to reinvest it in non-pensions vehicles. Of the 55 per cent who are taking full withdrawals, data from the FCA’s Retirement Outcomes Review suggest 52 per cent are placing these assets in cash or investments within ISAs, savings or bank accounts.
Commenting on the report, Tom McPhail, head of policy at Hargreaves Lansdown, said: “For all the recent successes of auto-enrolment and pension freedoms, investors still face significant risks in saving for retirement. Average contribution rates have fallen and many millions of people either aren’t saving enough, or simply aren’t saving at all.
“Pension scams and low levels of trust, confidence and understanding all continue to undermine investors’ prospects of a comfortable retirement. Investors are often lukewarm at best at the prospect of spending their time and money preparing for retirement.”
He concluded: “We’ve laid some really positive foundations for peoples’ futures; the essential solution for policymakers, regulators and the pensions industry now lies in making it simpler and easier for individuals to engage with pensions and plan for retirement.”
