Need to know:
- Nearly a year after the introduction of the pension freedoms in April 2015, confusion still exists around these.
- Pension scheme providers have a key role to play in guiding staff to information sources such as Pension Wise.
- Establishing quality standards around at-retirement products could make it easier for staff to distinguish between options.
Before the pension freedoms, which give staff additional flexibility around how they take their pension savings at retirement, came into effect in April 2015, there was widespread speculation around how employees might exercise their new rights and spend their pension pots.
Fast-forward nearly a year and, on the whole, these predictions have not come to bear. After all, how many retirees have actually spent their pension pot on a Lamborghini?
But, in the same way that such predictions have not become reality, neither has anticipated take up of the freedoms. According to the Pension freedoms: no more normal report, published by the Pensions and Lifetime Savings Association (PLSA), in January 2016, just 400,000 people took advantage of the freedoms in their first six months, of a possible 2.8 million who could have done so.
In part, this is due to an on-going lack of understanding around the new options, among both employers and employees.
Graham Vidler, director of external affairs at the PLSA, says: “Employers are likely to be as confused as anybody else about exactly how the new system works. There are some basic complaints like when people come up to the point of retirement and ask their pension scheme to get their money out, their scheme will tell them to go to speak to [the government’s free guidance service] Pension Wise to get some guidance about how they might do that.”
“Disappointingly, relatively few people are doing that. Our research shows that only about 5% of people actually spent time with a Pension Wise guide going through their options.”
The question is: where should responsibility lie for educating employees about their options at retirement? While there is a recognised information gap among employers, even if they were to address this, they may not be the most appropriate source of information, says Vidler.
“Organisations have got businesses to run and that is where their time and focus will, and should, be,” he explains. “I think it would be unreasonable to expect employers to study and seek to understand what is a complex and slowly emerging market. If we can get to a situation where we have some clear definitions of what good looks like and some products out there that are exemplars, then it becomes much easier for employers to give staff a little bit of information coupled with the introduction that there is a free guidance service out there that they really should take advantage of.”
Vidler adds that providers have an instrumental role to play in helping to increase employee knowledge and understanding. “It is incumbent on pensions schemes and pensions providers to continue to provide engaging communications to people, not just when they are thinking of retirement but 10, 15 or 20 years beforehand so they can start to prepare to make the right decisions,” he explains.
“Fundamentally, we are not going to quickly get employees into a place where they become financial experts at the point of retirement. So, for the foreseeable future, we need to have a system in place when people come to make retirement decisions that protects them from making bad decisions and protects them from inertia. We need to get them to the guidance and we need to make it easier for them to compare products out in the marketplace.”
In order to achieve this, however, it is first necessary to establish quality guidelines around what exactly constitutes a good product. “People need to be given a little bit more direction about where they might find a decent product and we need to coalesce around the definition of what a decent product is,” says Vidler.
“When you sit down with people and ask them what they want from their retirement pot they tend to describe a combination of a guaranteed regular income for the rest of their life with a little bit of flexibility to take a bit more when they might need or want to.
“Contrast that with what most people with modest pots are currently doing, which is either take an annuity or taking the cash and putting it typically in a bank account and you can see a bit of a disjoint there.
“What most people describe is what we would call drawdown. An intervention, which makes it easier to understand the features of drawdown products and compare them in terms of how they are governed, how good the communications are, and how much they charge for a possible service, will really help to bring that demand out.”
But when it comes to what the future holds for the pension freedoms and member engagement with these, only time will tell. As Vidler says: “Employers, like employees and like many of those working in the pensions industry, are still waiting for a market to emerge and norms in behaviour to emerge.”