The pension changes – one year on

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Jonathan Watts-Lay (JWL), Director, WEALTH at work, discusses the impact of the pension changes one year on with Tony Suckling (TS), Director, Watts-Lay talks about how much has actually changed, if employers have adapted to the changes, what employers are doing to support their employees and when employees should start to consider retirement.

To view a recording of the interview please click here.

Please see below for the transcript of the interview

TS: To talk about the pension changes one year on we’re joined by a Director of WEALTH at work, Jonathan Watts-Lay. So these pension changes, a year now has passed very quickly I might say, what have been the main changes over this last year?

JWL: Well I think from an employer perspective we’ve gone through three phases. I think we’re in the third phase at the moment. I think the first phase, which was effectively pre the regulation coming in, there was an element of paralysis almost because they didn’t really know how to react and what it would really mean for them. I think there was a lot of pushback from providers and pension administrators because of constraints around the systems and cost, so not a lot happened in that first phase.

I think we then went into a second phase, which was probably the middle of last year, which in part was reaction to members and employees saying, ‘actually this freedom and choice thing is a good thing, we like this, we like the fact that we can get hold of our money’. So I think that meant that a lot of employers and a lot of trustees said, ‘well hold on, we’ve got to take this thing seriously, we’ve got to look at this’. But of course when they looked at it, and they looked at it within their own schemes, they still realised there were quite a lot of issues with it. There was still the issues of costs and risk; particularly for trustees, do they really want to be responsible for someone when they’re 80 years of age and maybe running out of money? And there were system constraints as well. But perhaps the biggest thing of that second phase was the fact that they realised that of course for the first time this was not just about pensions. What freedom and choice was doing was saying to people, ‘actually you can create retirement income but you need to think about all your money and assets. So not just your current pension but all your old pensions, also ISAs, and the savings you have’. So all of a sudden that put it on a very different footing.

So I think we’ve now entered the third phase, which I think has occurred in the last few months, which is where employers and trustees are now saying, ‘actually what we really need is a retirement service provider. So somebody that can come in, can actually help our employees understand what freedom and choice is about. Give them advice if that’s appropriate; perhaps more importantly actually take account of actually all their assets which will need to be considered when retiring’.

TS: How have employers adapted to the change?

JWL: Well I think with this phase three as I call it, I think what’s really beginning to happen now is employers are understanding that their employees fundamentally have three questions around freedom and choice. Their first question is, ‘OK so what does freedom and choice really mean? What are these options that I now have? What are the advantages and disadvantages of those options?’ Because it’s fair to say there’s no slam dunk in all of this, people do need to make some judgement calls.

I think the second piece is then, ‘OK as an employee or a member if I now understand what these options are, how do I know what’s right for me? Because my situation is very specific to me, it’s not the same as the next person. The types of pensions I might have had historically will be different’. And often you want to retire with your partner, so for a lot of people it’s like actually they’re trying to calibrate that. So if you’ve got your partner and their pensions and savings that they may have, all of that needs to be considered. So they want to understand how that works in the light of income tax for example.

And then the third thing they will ask is, ‘OK I now understand what perhaps I should be doing, but how do I implement it?’ And of course if you can’t implement it in the workplace then where do you go to implement it?

TS: All these things used to be relatively easy. At the age of 60 or 65, your pension arrived over the doorstep; you didn’t have to make any decisions at all. Those individual decisions are now absolutely crucial for wellbeing for the rest of your life. What are employers doing in order to support their employees now with those decisions?

JWL: Well I think you’re absolutely right. There’s a real recognition now that for most people it won’t be a single decision going into retirement; for a lot of people it will be a number of decisions as they go through retirement. So fundamentally they’re looking to put in place a retirement service. So something that can help the employee not just at the point of retirement, or indeed the lead up to retirement, but actually beyond retirement as well.

So a lot of employers are looking at financial education in that lead up to retirement; making sure that employees understand what those options are, what the advantages and disadvantages are of each of those options. And a lot of them are also either providing or giving access to financial advice. So making sure that those individuals know who they can go and talk to to get that specific advice that they need about their situation. And then the third bit is really having a provider in place that can actually implement for those individuals.

So of course it used to be very easy in the old days of just an annuity. It was like well here’s an annuity panel and pick which annuity provider you want. Now I should add to that that a lot of people actually got it wrong when it was just a choice of annuity, as they still managed to buy the wrong annuity. So it is far more complex now, which is why it’s really important to have a service provider that’s not only going to help you implement at the point of retirement, but will actually look after you in what could be 25 years in retirement.

TS: In a sense though it’s not the employer’s responsibility as much as it used to be now to help the employee get this right. Is that fair? Responsible employers have always helped but now these sorts of decisions are being made by individual employees now; it’s the responsibility of the employee isn’t it?

JWL: Well it is in part, but of course there’s a rather interesting commercial considerations for the employer. So one of them might be for example; So now somebody could take money out of their pension at age 55 but not even retire. If you’re an employer making generous contributions to someone’s pension, do you really want them depleting that pot that in part you’re funding as an employer? So that when they get to an age, let’s say 65 when they might seriously think they want to retire, actually they can’t afford to because they’ve already depleted their pot. So as an organisation do you want that to happen? So again some education around the implications of that are fairly important.

Equally people understanding they can afford to retire is also another important aspect. We get a lot of examples where employees are in their 60s, that could probably afford to retire but they don’t because they don’t understand that they can afford to. So again, educating people about how much money they will need. And doing very simple mathematics about, ‘these are the costs you have when you’re in work, let’s have a think about the costs you may have when you’re no longer in work, and let’s compare what income you might need.’ Because of course, there are differences. For example National Insurance, you pay when you’re in work, you don’t pay when you’re drawing a pension. So there are key differences that a lot of people don’t understand.

TS: When should employees start to consider retirement?

JWL: I guess the purist answer is from the day they start work in the sense of the earlier you start saving the better.

But it’s often quite hard to convince people in their 20s that they should be putting a lot of money into pensions. So I think that whilst of course that is a consideration, and again people need to understand that, perhaps it becomes really critical what I would call mid-career. So at the point where people probably have saved something, but actually how much have they saved? They’re 20 years into their career, they’ve got another 20 years to go let’s say, how much money have they saved? Are they on course for the retirement that they may like?

There’s an additional issue now of course as well, which is glide path, so actually what investment programme are you following in what is often 10 years, (it differs company by company) in the lead up to drawing money from your pension. So of course if you look at it from that perspective you may say, if someone can technically take money out of their pension when they’re 55, they could go on a glide path when they are 45. So that would suggest they need to understand what their investment choices are by age 45 if they’re thinking of taking money out at 55.

But of course it then needs to be monitored and managed throughout that 10 years, because you might just change your mind. You might decide you’re not going to retire at 55, you’re going to retire at 75, or I thought I was going to buy an annuity but actually now I think I might go into drawdown, so again your investment should be different. So I would say the midpoint of your career probably at the latest, but the purist would say day one.

TS: Then just a thought from you, is this is in terms of pensions regulation and major pension changes? It’s often called a revolution. It was pretty revolutionary what we’ve been through over the last couple of years or so. Do you think it’s now time for the government to say ‘right OK everything’s in place, let it all settle down, let us deal with what we’ve got at the moment before we introduce anything more.’ Do you think they’re going to be still tinkering?

JWL: Well I think they probably will change because I think it will ultimately be more about looking at tax reliefs and how fair they are. And of course depending on your perspective, different individuals have a view on that, but I think for that reason alone they will carry on looking at it. I would suggest the next Budget. But in terms of the changes and the revolution as you say that’s already happened, I think one of the key things now is actually making sure that the provision for 21st century retirement is now in place, and that we’re not going back to the old providers of the old annuity market, and expecting them to deliver a 21st century solution. I think there’s a lot of what I would call new kids on the block. I like to think we’re one of them – who can provide much better solutions now for people going into retirement.

TS: On that note Jonathan Watts-Lay, thank you very much indeed.

JWL: Thank you.