A step in the right direction

2nd December 2014

Jonathan Watts-Lay, Director, WEALTH at work discusses the possibilities of the Budget reforms with Pensions World.

Individuals aged 55 will be able to access their entire pension flexibly. So will this be a car crash or a wondrous revolution?

Watts-Lay:  Most product providers will not be ready, but is that a bad thing? I am not sure a product from the traditional insurers is actually the best option. We are getting into an area that I would call “service provision”. There will be customers with a range of needs over time and people will start thinking about retirement in a completely different way.

The Citizen’s Advice Bureau – do they have financial expertise?

Watts-Lay:  It’s a step in the right direction. The feedback I’m getting is that a lot of large companies will arrange their own financial education at retirement, in the same way they have been doing it for years. Employers are saying: “We will do the right thing for our employees anyway, and we can arrange appropriate follow-up advice, whether that is regulated advice or other services that may be available.” However, that won’t be the case in small companies, where there is no pensions or HR department, and that is why the Guidance Guarantee is a good step in the right direction.

I hear all the debates about whether advice should be available from the age of 22 and of course it should, but one step at a time. The danger is that people could ultimately end up being very frustrated. Imagine a situation where someone goes to the Citizen’s Advice Bureau and has a small pot, but not much by way of other assets. They may want to take the cash, but are made aware that they will need to manage that against their income tax. The individual may decide to take the cash over a couple of years, but the problem arises when they ask: “How do I actually do that?” I can see people being told to go back to their employer and ask them. But a lot of companies will just say: “Fine, where do you want the cash sent, as we can’t do this within the scheme?” Many could be left in limbo, where they have taken the Guidance Guarantee, worked out what they want to do, but no one has actually been able to tell them how to execute on it. This could be one of the frustrating elements to come out of this.

It’s also about functionality – a lot of occupational schemes don’t have the functionality, so it does not matter what the guidance says. They’ll say unless you want them to transfer it to a third party, they’re not going to do it. There are a whole range of reasons why a company might not like it, ranging from trustees not wanting to have responsibility for members’ funds when they are actually in retirement, to employers not wanting the administration costs. Members may want to withdraw funds in small amounts, including what may be thousands of deferred members. I’ve only found one company that is seriously considering this, and I’m not even sure that they are going ahead with it.

So people have guidance, and they are signposted to advice. Are there enough advisers?

Watts-Lay:  There has been so much bad press about advisory services that people have convinced themselves they don’t want to pay for it. And yet, if you look at all the mis-buying that has happened over the last few years of annuities, people did not understand the commission they were paying. In many cases, this would have covered the cost of advice and resulted in a better deal. We need to point out the value in advice such as consumer protection. And if people go online, they will be paying commission anyway.

The NAPF has said that even signposting to the Guidance Guarantee could cost a large firm £100,000.

Watts-Lay:  Some companies  will see the opportunity of transferring DB to DC as a way of managing deficits by offering very attractive transfer values. If this is the path taken, considerable due diligence should be undertaken on an appropriate advisory firm. With DC, the question I’m hearing is: at 9am on 6 April next year, when someone phones the company and says “I’d like my cash, please”, what is your answer going to be? I was with a client the other day who doubted it would happen, because only a couple of employees had asked about it. My response was: “Perhaps they read about it in the papers every day and assume you’re going to do it.”

Trustees need to make sure there is no bias built into the system. Right now, a lot of companies have negotiated deals with annuity brokers, which they subsidise; but these services may not be full market or may include impaired annuities. One of the first things the company must do is to take all the biases out. If you subsidise one, you must subsidise the lot.

DC default schemes will need modifying. What is your take?

Watts-Lay:  In the new world, it is not just about pensions. People have ISAs and so on, and the question becomes how you manage all of those, which in theory could all be invested in the same thing, although the tax position will be very different. There is all this to take into account. The danger is that trustees only ever think about the pension.

Turning to the next question, has the death of the annuity been exaggerated?

Watts-Lay:  I think annuities might end up being 10–20% of the market, but as the first swathe of people get older there is likely to be a slight increase on that.

I think people will be sensible in the main. It goes back to communicating in a meaningful way, so that people understand the risk of running out of money. And I do hope the message gets out in 2016 that the flat rate pension is just subsistence living. This is actually saying to people that, just as they had to manage their money in the first 30 to 40 years of their working lives, so they also need to do that in retirement.