Ordinary savers are in the dark when it comes to navigating retirement options. Schemes must act now
More than 14.8 million people now save into a defined contribution scheme and the amounts being paid in are slowly but steadily increasing.
And with minimum rates rising to 8% in 2019, the days of average DC retirement pots of £30,000 will soon be over.
That’s great news for the industry, but freedom and choice has muddied the waters, leaving experts concerned that millions of people could make the wrong decisions.
Already, evidence is mounting that the average person has a poor understanding of what options are available. Many savers are burying their heads in the sand when faced with the complexity of choice – and we know that most retirees are failing to shop around.
Members are turning to retail drawdown options – which are expensive”
In the accumulation phase, costs are being controlled and there is more focus on default pathways to help guide members towards an acceptable outcome. Some schemes, such as that at hospitality company Whitbread, have even stripped out investment choice altogether to make things more straightforward. As a result, they’re reporting greater engagement and higher contributions.
But at the decumulation stage, members are turning to retail drawdown options – which are expensive. And they’re doing so without looking for the best deal.
Research from the Association of British Insurers found that 94% of nonadvised drawdown sales are made to existing providers. People no longer have to buy a poor value annuity, but instead they’re buying into complex products without seeking help.
We’re at the edge of a crisis, and the concern is that if members make poor decisions and run out of money, the good work of auto-enrolment and any remaining trust in pensions will swiftly start to unravel.
Getting guidance (or not)
It’s plain that guidance is part of the solution. It’s free and comes with none of the issues associated with advice.
Alarmingly, take-up thus far has been poor. Despite expensive advertising campaigns, most people simply aren’t taking advantage of the services available. This is despite the fact that those who do seek guidance tend to find it extremely helpful.
Institute and Faculty of Actuaries (IFoA) president Marjorie Ngwenya, says: “We understand that individuals may not want or be able to pay for advice, but take-up of free guidance is very low and the reasons for this must be explored to encourage people to access the support that is available.
Take-up of free guidance is very low”
”In an earlier IFoA survey, 45% of respondents did not understand the difference between free guidance and regulated financial advice that must be paid for.”
More needs to be done to encourage people to take advantage of services such as Pension Wise. Ngwenya suggests that auto-enrolling individuals into a free guidance session before funds are accessed could help to increase take-up.
This would seem to be an obvious solution and would go some way towards increasing awareness and education. And it would be a good start in making sure that members have a basic understanding of the paths that are open to them, and the accompanying tax implications.
But as the value of DC pots rise, it’s unlikely that guidance alone will be enough to ensure good outcomes for all retirees.
Convincing members to take full financial advice would be a good step. Unfortunately, the advice industry faces myriad – and well-documented – problems, ranging from a mistrust of the profession to a lack of qualified advisers.
A piece of research commissioned by State Street and The People’s Pension found that consumers were reluctant to seek formal advice. Of 80 respondents, 31 spoke to a financial adviser during their decision-making journey, with only 17 of these proceeding beyond the free consultation stage.
And scheme members who are not offered free advice are even less likely to seek it out.
One of the biggest barriers is the perceived cost. People consider independent financial advice to be expensive, and the reality is that it is not a cheap option.The government has made some strides towards conquering the cost problem by allowing retirees to take £500 from their pensions savings to pay for advice.
One of the biggest barriers is the perceived cost”
Jonothan McColgan, the founder of advice firm Combined Financial Strategies, says: “Unfortunately, with the average cost of advice at more than £150 per hour, the £500 allowance would only buy you about three hours. For this you could get a general financial plan on what you need to get your finances in shape and an assessment of whether your pension is invested in a suitable way for you.”
Anyone who wants specific recommendations on what to do with other savings, pensions or investments would have to be prepared to stump up more money for an adviser. Hopefully, however, by getting people through the door with the £500 allowance, those who would benefit from further advice will be encouraged to pursue this.
In any case, the cost issue is – or should be considered – a red herring. People are more than happy to pay for advice for other big-ticket purchases. For instance, few of us refuse to see a mortgage adviser when we buy a new house.
Karen Barrett, chief executive of Unbiased.co.uk, says: “Looked at objectively, pension advice really isn’t a huge cost. If you compare it to buying a home, people willingly pay the average solicitor’s fee of £1,500 because they know it’s necessary.
The cost issue is a red herring”
“A pension is of comparable value to your home, so getting proper advice is equally important. What’s more, good pension advice will generally pay for itself within a few years.”
In fact, research from Unbiased.co.uk in 2015 found that taking financial advice adds, on average, £48,279 to a retirement pot. But trust is still a problem, and one that the industry continues to struggle with. Far too many people associate independent financial advisers with past scandals.
Here, both schemes and employers can play a role. By facilitating advice, through a paid-for, in-house offering or by linking members up with trusted third parties, trust can be engendered that should help encourage members. After all, a average saver is more likely to believe that an adviser recommended by the HR department is legitimate than the one they’ve been forced to pick out of a phone book.
Even if we can solve the advice issue – through better education and access, and looking at the cost of advice in the context of its value, a huge part of the puzzle is still missing – the thorny question of the options available.
At the moment, there is a seemingly unconquerable divide between the accumulation strategy and what actually happens at retirement. Over the past decade, the savings journey has been revolutionised into something that works for the mass market. We have simplified savings options, introduced a charge cap, and created mastertrust products that allow people to save simply, but effectively.
For NEST, the answer lies in well-governed guided pathways”
Meanwhile, at the point of retirement, it’s a mess. In the unlikely event that we could convince everyone to take advice, the products are too expensive (and too geared towards big pension pots) to be truly fit for purpose.
And while we may convince people that they need to understand their options better, and take advice on (broadly) the right path, the reality is that few savers will want to pay an ongoing charge to have their money managed. And for those with smaller pots, that is even less likely to be the best solution.
So in addition to rehabilitating the reputation of the advice market, we also need some type of institutional drawdown option. This would be something that’s low cost and defaults those who are unwilling to take ongoing advice (or too afraid to make a decision) on to an acceptable post-retirement path.
We also need some type of institutional drawdown option”
As Mark Rowlands, director of customer engagement at the government’s workplace pension NEST, says: “It isn’t a binary choice between advice or a guided pathway – the two complement each other.
”For NEST, the answer lies in well-governed guided pathways achieving a minimum standard and a competitive advisory market for those with larger pots and more complex needs.
“These days, retirement is a process, so solutions need to last for 25-plus years. The complexity of the decisions means pathways, with minimum standards and professional governance by trustees or an independent governance committee. This is the best solution for members – whether engaged or not – unless they have opted for ongoing financial advice.”
Whose job is it anyway?
The case for promoting advice and creating mass-market retirement solutions seem plain. But neither is straightforward.
The IFA industry cannot reform the reputation of advice on its own, because the trust deficit is too great. This is why HRs, scheme managers and trustees need to fly the flag for advice.
And while there’s an obvious benefit for asset managers in creating solutions that keep members in the institutional market post-retirement, these same schemes and businesses are critical in making sure that the solutions are fit for their members.
But pensions have their own reputational issues, and unless the whole industry can pull together to create retirement solutions for the mass market – people will be put off pensions saving once and for all.
This article originally appeared in the DC landscape report. To get the full report, click here.