American writer and philosopher, Elbert Hubbard, once said that ‘responsibility is the price of freedom’.
Slowly but surely, we have seen government policy driving improved freedom and choice in retirement savings. But this is not without price. The responsibility for our future income has shifted from the state and the employer to the individual.
Advisers have been playing a critical role in helping individuals take on this increased responsibility. But if responsibility is the price of freedom, are we as a profession well enough equipped for it?
We all remember it, don’t we? The announcement in 2014 from George Osborne “Let me be clear. No one will have to buy an annuity”
It was an almost universally popular policy at the time, giving millions of savers aged over 55 access to their pension capital for the first time. Since April 2015 when the rules came into play, we have seen drawdown sales grow to over £20bn a year¹, while annuity sales have slumped². Transfer activity has rocketed as people take advantage of increased control over their savings:
Pension freedoms led to more people taking on individual responsibility for their retirement incomes than ever before. Advisers know better than most the complexity of this planning, and the assumptions made.
Making sure the money lasts long enough is the critical success factor of any retirement plan. Ask an individual to estimate their own longevity, and they will typically underestimate by around 5 years for men and 8 years for women. Interestingly, something as simple as framing the question in the right way can make a difference. If individuals are asked to estimate how long they would “live to”, on average, they suggest a life expectancy that is 9.2 years longer than those asked when they thought they would “die by”⁴.
As a profession, we’ve seen very few developments to help advisers support this changing climate. Confidence in retirement planning assumptions is critical, and yet, often, advisers are left on their own.
It’s not just pension freedoms that have revolutionised retirement saving – there’s been a pretty big revolution going on in the workplace too.
Since 2012, employers have been compelled to auto enrol employees into a workplace pension. At the same time once-common defined benefit schemes in the private sector have been almost totally obliterated.
Pension participation is at a record high, with 73% of employees now having an active workplace pension scheme – up from less than 47% in 2012 ⁵.
This increased level of saving can only be a good thing – but no longer will they reach retirement and simply ‘tick over’ into receiving an income from their DB scheme. And if, like me, they have moved between several companies, it gets even more difficult to estimate how much they dare risk withdrawing when they retire.
What will these employees do when it’s time to retire? How will they secure their incomes and manage their finances? Can they afford advice? And are we, as a profession, ready to help their employers help them?
The 2008 financial crisis led to the extraordinary new policy of quantitative easing as policymakers across the western world sought recovery and stability. The resulting impact on gilt yields led to some staggeringly high cash equivalent transfer values being offered by defined benefit schemes as they look to manage their liabilities.
Suddenly, individuals were being offered more money than they’d ever dreamed of – which, combined with the pension freedom legislation, they could actually get their hands on!
We all know about behavioural biases when dealing with money – and this provided a veritable feast of them.
Present bias, regret aversion, and uncertainty aversion all play a part in decision making in this scenario – often overshadowing the facts on whether it is the right thing to do or not. Advisers have a critical role in cutting through these biases – without forgetting that they too are susceptible to the same!
Transfers peaked in the year ending April 2018 when c.100,000 individuals cashed in £14.3bn from their DB schemes ⁶.
We are seeing unprecedented movement of money from ‘institutional’ to ‘retail’. And yet, we aren’t seeing the capabilities used to manage that institutional money move with it. The actuarial assumptions, the governance, the oversight isn’t accessible to the retail adviser – who, after all, is now doing a similar job of balancing assets and liabilities in the individual's retirement plan to that of the scheme trustee and the pension scheme - albeit on a much smaller scale. And of course, the trustee has the ability and scope to ‘self insure’ the risks because of the numbers in the scheme. You simply cannot self insure at the level of the individual/household – so what options do we have?
MiFID II introduced the requirement for advisers to deliver ongoing suitability – although irrespective of that regulation, managing a drawdown plan is not, and never has been, a 'one and done'. The need for regular and thorough ongoing reviews of retirement plans has always been critical.
The problem is that as more people want to access their retirement savings flexibly – taking advantage of the freedoms bestowed on them by Osborne – the more reviews advisers need to do.
As we enter what many feel will be a period of choppier market returns, the need to understand retirement plans and develop robust review processes is more important than ever.
Yet the technologies advisers use to support advice processes are anything but integrated. That creates inefficiencies and makes the process expensive, so fewer people can afford the advice they really need.
So we have four powerful factors: pension freedoms, auto enrolment, institutional to retail and MiFID II's requirement to evidence ongoing suitability. Not only that, but at Parmenion, we believe that investment returns over the next decade may well be below those created by QE as we enter the era of quantitative tightening. This all combines to give our profession greater responsibility that ever before.
That’s the price of pension freedoms - the responsibility that our profession now shoulders to help individuals realise their retirement dreams. Are we really equipped for these challenges? It is time for innovation, it is time for better support for advisers in delivering great client outcomes, and with the potential for a perfect storm on the horizon, that time is now.
¹ FCA Data Bulletin - 2018
² House of Commons Work and Pensions Committee Pension freedoms Ninth Report of Session 2017–19
³ Investment by Insurance Companies, Pension Funds and Trusts time series dataset, Office for National Statistics, 2019
⁴ Dr Laura Haynes @ The Pension Debate November 2018 – original source Payne et. al. (2013). Journal of Risk & Uncertainty, vol 46, pp 27–50
⁵ Annual Survey of Hours and Earnings (ASHE), Office for National Statistics - 2018
⁶ The pensions regulator FOI request, May 2018
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