Baroness Altmann the former Pension Minister has made her view on Defined Benefit (Final Salary) transfer advice very clear. On the back of the latest FCA report on transfers, baroness Altmann expressed surprise that it had taken until October last year for the FCA to ban contingent charging in the pension transfer arena. Contingent charging is where you only pay if the advice is to transfer your pension. If the advice is not to transfer then you wouldn’t have to pay for advice. In Altmann’s view that created a significant risk that an advisor would advise on a transfer because the attraction of being paid a fee was too great. She believes that consumers should have to pay for advice (even if the advice is not to transfer) and that those who can’t afford advice should have to stay in their existing schemes.
We’re not sure this exactly what the Government intended when it introduced the so called “Pension Freedoms” back in 2015.
The Baroness was also surprised at the revelation that almost 10% of firms had admitted to the FCA that they weren’t covered by Professional Indemnity Insurance (PII) to advise on pension transfers. It’s not clear from the FCA’s figures whether this relates to firms who no longer advise in this area, or more worryingly those who continue to advise in this area. Altmann acknowledges that there is a big issue with PII provision in the advisor market. This is borne out by the fact that firms advising on final salary pension transfers have declined from 2,400 down to only 1,300.
When you combine the two factors, the requirement to pay upfront fees for advice and the decreasing number of advisors able or willing to provide advice in the pension transfer market then there is clearly a problem and consumers are being disadvantaged by not being able to access transfer advice.
This problem is important when you consider the broad background of pension provision in the UK. We’ve seen significant structural changes to the state pension over the last 10 years or so. Men and Women have had their pension retirement ages equalised and changes put in place to increase the state retirement age steadily over time. From 65 progressing to 68 and no doubt it will be increased further. In combination with the introduction of auto enrolment in the workplace you can a future in which state pensions become less available and individuals will have to rely on making their own private pension arrangements. Whilst this might not take real effect for 30 years, many market analysts believe that this is inevitably what’s to come. Which is why it is so important that people are able to manage their existing pension arrangements without restrictions on the availability of advice or cost barriers.
The whole system needs to be reviewed.
Of course, as we move towards a privately funded pension system other issues will become increasingly important as well. Not least the amount that we contribute into our pensions and factors which might affect this – like a global pandemic for example!
Latest figures from the Office of National Statistics (ONS) show that Employee Contributions have fallen by 11% and Employer Contributions by 5% over the six-month period from January to June 2020. These figures are not surprising given how many workers were placed into the Furlough Scheme by Employers over that period, receiving 80% of their wages. The impact of these reduced contributions will not be felt immediately but will have an effect over the long term. Exactly what effect we can’t calculate at the moment.
Then there is the issue of managing your pension in drawdown to ensure that you do not run out of savings in your retirement. This is becoming a real issue. The latest data from the FCA shows that two thirds of people are entering drawdown (spending their pension) without the benefit of pension advice. This is concerning because at the same time figures show that the average rate of withdrawal is 8% or more per year, which most advisers believe is unsustainable. There are calls for the FCA to intervene with regulation to make sure that there are some clearer rules around drawdown and advice. Any regulation however will need to be thought through because retirement spending is never a straight-line equation. Most research shows that spending (or drawdown) declines with age, so the drawdown model usually allows for more spending in the early years of retirement and less in the later years. This is where pension advisers can help consumers by creating cash flow models to help them understand their requirements.
One of the Governments plans to tackle this is to provide greater access to their free Pension Wise guidance service. Unfortunately, as the figures show this doesn’t seem to be working.
With take up rates as low as 1% in some areas like London.
Like anything though, its not all bad news. Baroness Altman remains convinced that the 2015 pension reforms were still the right thing to do, giving people far more flexibility than the previous compulsory annuity system. Although as we’ve mentioned those entering drawdown may be drawing too heavily on their pensions, the overall numbers are small. So far, since 2015, only £45 billion has been withdrawn from pensions – that represents only 0.1% of the invested pension assets in the UK market, over 4.7 million pots. So perhaps we don’t need to worry about people being cavalier with their pensions.