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Pension freedoms: sounds great, but is it working?

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Ian Neale debates the ideas proposed by the WPC when it comes to deciding what to do with your pension pot.

The House of Commons Work and Pensions Committee (WPC) thinks pension savers need more help to make a good choice. Flexible drawdown can be difficult and expensive to access, and advice is similarly costly. 

The key question remains, who’s pulling it all together? In a potentially influential new report, the Committee has come up with three big core ideas to address these industry issues.

The WPC believes that when it comes to deciding what to do with your pension pot, there should be a viable alternative between cashing it out entirely and spending it all on an annuity.

Flexible drawdown ticks the box, but not every DC provider offers it. Among those that do, a competitive market has yet to develop, so there is no incentive for pension savers seeking a drawdown solution to shop around. Many are also reluctant to pay for advice, and so they tend to stick with the name they know.

The solution proposed by the WPC is twofold: first, that NEST should be allowed to enter the drawdown market, and second, that every drawdown provider should be required to offer a default decumulation pathway suitable for their “core customer group” by April next year, with charges capped at 0.75% as for auto-enrolment. 

Neither the WPC nor indeed the FCA has put forward any idea of what this default drawdown route might look like. As such, many commentators have been sceptical because individuals’ circumstances in later life are so variable, so defining a “core customer group” can become challenging. That might be less difficult when workers are being auto-enrolled, many for the first time, into a pension scheme; and in any case, there is usually plenty of time to correct mistakes - less so at retirement.

So while they are right to highlight the dysfunctionality in the drawdown market, the WPC’s solution still looks problematic.
Their second idea is about how to increase consumer engagement: pension wake-up packs don’t work because they are too bulky and too wordy: instead of an off-putting “pack” of information the WPC thinks a one-page “pensions passport” has more chance of being read.

But savers also need to be engaged much earlier, so they propose a ‘mid-life MOT’ at age 50. All this combined with the future of automated advice, or so called ‘robo-advice’, could be promising, provided it is proven to be reliable and trustworthy.

The WPC’s third big idea to make pension freedom a success will no doubt provoke more controversy. Although there’s a strong consensus now in favour of the pensions dashboard, opinion remains divided though on whether we should have just one dashboard, or many. 

Initially the government said development should be “industry led”: so the ABI responded energetically and demonstrated a prototype last October. Insurers have shown that they want to offer their own dashboards, and might be able to get them up and running by next April - as the Government wants.

However, the WPC has weighed in with strong support for the alternative of a single dashboard, hosted by the new Single Financial Guidance Body which is due to be established in October this year. They also think that data provision by all pension schemes should be mandatory.

From the individual’s point of view this would be the simplest way of ensuring they can see all their pension entitlements – state, DC and DB - in one place, free of commercial bias. If we’ve learned one lesson from recent decades, it’s that pensions need to be made simple.

DC providers have less to gain from the single dashboard, but in theory they should not have great difficulties in complying, except perhaps in extracting data from ancient legacy systems. If the dashboard is required to show a projected pot value, figures from the annual SMPI statement might fit the bill.

The Pensions Minister has acknowledged that the state pension will be a key component. This makes sense because for some time to come it will continue to form the foundation, if not always the lion’s share, of each person’s retirement income. It should not be hard to derive the figures using the existing state pension forecast program.

Recognising defined benefit pension entitlement on the dashboard is something else though. Inevitably there will be an unwelcome additional cost in calculating whatever measure is deemed appropriate, whether it be an annual CETV or some sort of projection.

The WPC is absurdly optimistic at this point. While declining to suggest how compliance might be managed, and noting that “some DB schemes, especially small legacy schemes set up long ago may struggle”, they still urge the Government to set a timetable to bring 80% of DB pensions visible on the dashboard by next April.

In former times a report such as this might have been considered worthy but impractical, and so shelved. In the current political environment though, the Government might not find it so easy to ignore.

Ian Neale, Director, Aries Insight,