History tells us greater choice, product proliferation and competition is likely to push up costs
At the time of the annuities reforms announced in last Budget, we criticised the hyperbole and expressed concerns about the impact on consumers particularly lower to medium income consumers.
Nothing we have heard so far has changed our mind.
As it stands, we think consumers overall will be worse off. There will be some winners but these will be consumers who are better off or just plain lucky (now that post-retirement incomes will become more of a lottery). No doubt the reforms will also create huge opportunities for parts of the financial services industry.
To be sure, the annuities system needed reforming but targeted reforms could have introduced a degree of flexibility and improved the value of annuities without damaging the annuity concept which allows pooling of risk (investment risk, market timing risk, prudential risk and longevity risk).
But, taking a dysfunctional system and introducing something worse is not a good idea.
Even though annuities were perceived to be poor value, the replacement products will not produce a higher income stream unless consumers are exposed to significant market and or drawdown risk.
Generally, the fewer resources you have to fall back on, the less you can afford to take a risk in retirement and it is not possible to predict with any degree of certainty individual longevity risk, unless in the most tragic circumstances. Even if traditional annuities remain, the unwinding of the market (removal of cross subsidies) means for many people these could be worse value than current products – in terms of the level of income guaranteed.
The scope of advice will not be limited to pensions and investment advice as more consumers will have to worry about tax implications
Producing a decent, fairly stable retirement income will require advice on risk management and asset allocation from appropriately qualified advisers. But the scope of advice will not be limited to pensions and investment advice as more consumers will have to worry about tax implications, impact on benefits, deciding whether to pay off debts.
The reforms open up new opportunities for more unscrupulous financial ‘advisers’
Moreover, the reforms open up new opportunities for more unscrupulous financial ‘advisers’ offering solutions to help consumers use pension money to pay long-term care, or pay off the mortgage.
Consumers will need advice at the point of retirement as before, but the potential risks involved and the need for regular reviews mean they will need ongoing advice. Overall, the amount and frequency of advice needed will be greater and more costly. Those on lower incomes will be less able to afford more comprehensive advice.
No doubt we will see more layers of advice and product ‘intermediation’ in the supply chain.
If history is any guide, greater choice, product proliferation and competition is likely to push up costs and extract further value from pension funds rather than drive down costs and improve value for consumers.
Will they have the capacity or simply end up referring the bulk of enquiries to regulated financial advisers?
Overall, we think that more cost – in the form of product manufacturing, advice and distribution costs – will be extracted from pension pots and when this happens it is usually consumers on lower incomes who end up paying disproportionately more. There is much store being placed on groups like TPAS and Citizens Advice being able to provide ‘guidance’ rather than regulated advice.
But will they have the capacity or simply end up referring the bulk of enquiries to regulated financial advisers?
The reforms could undermine efforts to build financial resilience and security.
The priority now is to develop better value, safer alternatives that in effect become the ‘default’ option for consumers to act as a benchmark for comparison and good advice, promote real competition and help consumers who are priced out of market options.
Mick McAteer is director of the Financial Inclusion Centre