26 PMI NEWS DEC 2015 WWW.PENSIONS-PMI.ORG.UK

Pension Freedoms – success or failure?

The introduction of the new freedoms in April 2015 was hailed bymany as the biggest revolution in pensions – ever.Some thought it was a good idea. Others had serious doubts.

Would the new options result in a dash for cash? Would savers aged55 or more with a defined contribution (DC) pot, cash it in and blowtheir retirement savings? Would they know enough to make well-informed decisions? Would they risk running out of money inretirement, and falling back on the State? Now April has come and gone. So what has happened?Statistics released so far reveal that there has been substantial

activity. Thousands have taken advantage of the new options, butthere’s no evidence of a huge surge in Lamborghini sales.

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Jim AitkenGroup Head ofMarketingaquilaheywood

The Financial Conduct Authority (FCA) surveyof pension providers gave an interestinginsight into the activity in the first three

months, revealing that over 200,000 pension policieswere accessed, compared with less than 100,000 inthe same period in 2013 – a year before the changeswere announced.

* FCA pension freedoms data collection exercise: analysis

and findings September 2015

The survey also revealed that the most popularoptions were uncrystallised funds pensions lump sum(UFPLS) full encashment and income withdrawal,with annuity purchases plummeting from 89,896 to12,418.

Research by several other organisations revealsthat people taking cash are using it for variousreasons including repaying debt, homeimprovements, helping their children to buy aproperty, and taking holidays.

Pension WisePrior to April, concerns were expressed aboutwhether the Pension Wise delivery partners – ThePensions Advisory Service (TPAS) and Citizens Advice(CA) – would be able to meet the demand andprovide a good service.

Roll forward to July, and the Government Workand Pensions Select Committee, chaired by FrankField MP, launched an inquiry into whether peopleare adequately supported in making good, informeddecisions about their retirement savings.

At one of its hearings in September, TPASreported that between April and August theyhandled over 70,000 pension enquiries, of which9,180 related to the Pension Wise service. AlsoCitizens Advice, in providing face to face guidance,reported that they were meeting the demand whichwas running at only 10-15% of capacity. There hadalso been 1.5 million unique user hits on the PensionWise website.

The Committee published its report in October. Init they noted that the take-up of Pension Wise hadbeen lower than many anticipated. It recommendedthat Pension Wise provides more personalisedguidance, incorporating an enquirer’s wider financialcircumstances, and that it improves its ‘static’website to incorporate interactive features like anincome calculator.

The Committee also recommended that pensionproviders strengthen the signposting to PensionWise, and that the Government should produce afirm timetable for introducing an online “PensionsDashboard”, which would allow people to see alltheir pensions savings in one place.

Access all areasGeorge Osborne’s bombshell announcement of the Freedom and Choice changes in his March 2014Budget caught most people by surprise – particularlythe pensions industry. Once they had identified theimpact, there was widespread concern about beingable to deliver the new options by April 2015, andradically changing their procedures andcommunications.

Some pension providers have risen to thechallenge, updating their systems, developing new products and introducing new processes andcommunications. For others it’s work in progress,especially those using old administration systemsthat cannot be adapted easily or quickly. As a resultthey have not been able to offer the new options totheir savers. This resulted in extensive press coverageof the disappointment their customers experienced.When a major pension provider announced in Junethat they wouldn’t be offering all the options, theDaily Telegraph launched a campaign called

Thousands

have taken

advantage of

the new

options, but

there’s no

evidence of a

huge surge in

Lamborghini

sales

t

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'Make pension freedoms work'. Other nationalnewspapers also covered this.

During the summer, the FCA and The PensionsRegulator conducted research with pension providersand workplace pension schemes to identify theextent of the problem. This research asked about theoptions available to savers, the requirements thatwere imposed, the procedures they adopted, thetimescales involved and any charges that applied.

This research was designed to identify any barriersfaced by those wishing to access the new freedoms,and so enable the regulators to decide if any furthermeasures are required to remove these. The findings(referred to in this article) were fed into aconsultation by HM Treasury on pension transfersand early exit charges, which closed in October.

Transfer to freedom Meanwhile workplace pension schemes have faceddecisions about their own approach to pensionfreedoms. Some have made the new optionsavailable, while others have decided not to.Individuals who cannot access the new freedomsthrough their existing scheme or provider mayconsider transferring their benefits to anotherprovider to obtain access. According to the FCAresearch above, 84% would not face an exit chargein doing so.

But even those able to access the freedoms withtheir current provider may have to transfer toanother contract.

On transfers, the research revealed aninconsistent approach by providers depending on:n their interpretation of the legal requirementsn their own strategy n the structure of their products n the nature and value of the benefitsn whether ‘insistent customers’ request a transfer

contrary to the advice received.

This has created a confusing situation.

For transfers out, some providers require the saver to take financial advice in all circumstances, others in only some. The situation is similar for transfers in.Some do not accept transfers at all, and others have a differing approach depending on thecircumstances of the case.

This has resulted in an increased demand foradvice, but many advisers are unwilling or unable to offer this. It is a complex area, and one wherethey may be held liable in future, even if a clientinsists on transferring despite their advice.

The challenge for many advisers is how to ensure their advice is watertight and cost-effective.

Recently we’ve seen the development of ‘roboadvice’ – an automated system delivered onlinerather than face to face. Already popular in the USA,it will be interesting to see how successful thisbecomes in the UK, and whether it can cope withour complicated pension rules and options.

Beware of scammersAn unwelcome consequence of the new flexibilitieshas been the increase in pension scams. Using thechanges as a reason to approach people, scammerscontinue to encourage individuals to transfer theirsavings, which they might never see again.Both the FCA and the regulator have stepped uptheir campaigns to make people aware of thedangers, but so far there has been no effectivesolution to stop the scammers’ activity and preventsome people losing their hard-earned savings.

Looking aheadThe Government is keen to ensure that the pensionfreedoms are a success, and that people can benefitfrom them without barriers being put in their way.

In the coming months we are sure to see somechanges to facilitate this as a result of the variousconsultations and the Select Committeerecommendations mentioned above. Indeed the FCAissued a new consultation in October called, ‘Pensionreforms – proposed changes to our rules andguidance’, inviting comments by 4 January 2016.

Providers are also working on new products thatwill be more suited to the needs of the freedomgeneration.

Also there has been renewed focus on thecreation of a ‘Pensions Dashboard’ (mentionedabove) that will provide a saver with access to detailsof all their state and private pensions in one place,helping them to plan ahead and make informeddecisions.

Pension Freedoms – success or failure? So, going back to my original question, has theintroduction of pension freedoms been a success or failure?

I guess it depends on your point of view. Probablyvery good for HM Treasury and scammers. Prettygood for some individuals who took advantage ofthe guidance and perhaps took advice. Questionablefor pension providers and pension schemes that have been faced with implementing the changes.

Overall my own view is “on target for success but much more work to do”.

Note: This article reflects the position at 15 November 2015

The challenge

for many

advisers is

how to ensure

their advice

is watertight

and cost-

effective

[ ]n

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www.aquilaheywood.co.uk

Reprinted with kind permission of The Pensions Management Institute