From the blog: Evidence is mounting that savers are at risk of getting a poor deal at retirement.
The combination of product complexity and consumer inertia that led to so many people getting a poor deal from the annuity market has been replicated under pensions freedom.
It is therefore time for government and regulators to push ahead with ambitious reforms that will help lower-earning members navigate the decumulation market without rolling back on pensions freedoms.
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Evidence is mounting that savers are at risk of getting a poor deal at retirement.
This problem risks becoming a crisis as increasing numbers of people come to retirement with defined contribution pensions making up the bulk of their old age savings.
Bolder savers with the experience and means to ride the markets alone could continue as now. But no longer would low and middle-income members be left to sink or swim
The government’s response to a hard-hitting Work and Pensions Committee report on the subject is expected imminently.
The Financial Conduct Authority will follow with the final report of its Retirement Outcomes Review about a month later.
Freedoms leave consumers equally inert
There were good reasons for reforming the old system, which obliged most retirees with a DC pot to buy an annuity. In particular, savers struggled to shop around for the best value product.
But blowing up the old system has left no obvious route for those relying on a DC pension to turn it into a replacement income for the wage they gave up.
The FCA’s interim report found:
Signs that cashing in at least part of a pension long before retirement is becoming a cultural norm;
Charges for drawdown are complex and opaque; and
Little evidence of savers “shopping around” for retirement products.
In short, the combination of product complexity and consumer inertia that led to so many people getting a poor deal from the annuity market has been replicated under pensions freedom.
Source: FCA Retirement Outcomes Review Interim Report
Defaults improve decisions
The FCA report contained important proposals that could make the system into less of a lottery for savers.
These included default investment pathways, a charge cap and having independent governance committees oversee decumulation products.
This was echoed by the Work and Pensions Committee, which said every DC saver entering retirement should be offered a simple, suitable, default pension option, with a low, capped fee.
It also said that the government should allow state-backed provider Nest to provide decumulation products from April 2019, including a new default drawdown pathway.
Wealthy savers will not lose flexibility
These reforms would not roll back pension freedom. Bolder savers with the experience and means to ride the markets alone could continue as now. But no longer would low and middle-income members be left to sink or swim.
Unfortunately, regulators often publish strong initial reports and then lose their nerve.
Likewise, government can be swayed by spurious claims about supply-side competition.
Default drawdown tops select committee's at-retirement wishlist
Providers of drawdown products should be required to develop charge-capped default products to help disengaged savers make their pension last, the Work and Pensions Committee has recommended.
Nevertheless, introducing default options and allowing Nest to venture into the retirement income space would be a pragmatic way of stopping a policy conundrum becoming a pensions crisis.
Tim Sharp is a policy officer at the Trades Union Congress focusing on pensions and investments
