2015 was the year of Freedom and Choice in Pensions.
Since then, defined contribution (DC) members have embraced the freedoms and started to access pensions earlier, often cashing in pots in one go and paying HMRC far more income tax than it anticipated. Income drawdown has become a more popular choice than annuities, with individuals increasingly accessing it without taking financial advice. But PLSA research has found the majority of individuals who were about to access income drawdown thought it was risk free, sometimes tax free and that it offered guarantees similar to those of annuities.
In fact, FCA’s Financial Lives matter research found huge numbers of members accessing their pensions didn’t understand their access options at all, or even that options exist.
When The Department for Work and Pensions introduced the idea of a single guidance body, it said; ‘Levels of financial capability in the United Kingdom are low and many people face significant challenges when it comes to managing their money’.
Not surprising that research from the International Longevity Centre highlighted that when making financial decisions, individuals find it hard to think long-term preferring rewards today over larger rewards tomorrow, and switching off in the face of complexity.
But there is another consequence of pension freedoms which is having perhaps an even bigger impact. In 2017 defined benefit (DB) pensions hit the headlines and failures involving BHS, British Steel and Carillion brought member support under the spotlight.
The news of Carillion’s collapse was accompanied by rumblings that some advisers were like ‘vultures’ circling members. This followed much scrutiny of the closure of the British Steel Pension Scheme and transfer of pensions to alternative schemes, with much of the advice given to members being deemed unsuitable by the FCA. The FCA has since revoked or accepted the voluntary suspension of transfer advisory permissions from several firms and announced a data collecting exercise from firms holding pension transfer permissions.
Elsewhere ‘high’ transfer values are seeing other DB scheme members transferring to DC pensions, and inheriting the risks involved in managing pension savings and retirement income.
But what can be done to protect members and employees?
The British Steel situation in particular has flagged a big gap for me; although information was available including a helpline and website content, in the main members were left alone to find help despite the pensions regulator ‘urging’ the Trustees to talk to members about the importance of obtaining financial advice.
But this doesn’t have to be the way. Employers and Trustees have access to professional advice from consultants and buying power and so are perfectly placed to facilitate access to a breadth of services including financial education, guidance and advice to help employees and members fully understand their pension scheme options, and the risks. This approach also comes with the benefit of having agreed pricing for services rather than leaving members to guess whether they are paying appropriate fees.
This service would ensure that any financial advice provided is by a firm who has been subject to thorough due diligence including ensuring robust compliance process checks – not only in complex DB cases, but as an everyday option. There is plenty of evidence that these services help members get better outcomes.
And whilst there are some employers and schemes doing this now – they are in the minority and it is time it was the norm.
After all, being picked at by vultures is hardly a good member outcome.