UK pensions reform: Replacing a nanny with a shark
Taha Lokhandwala considers how the new rules around DC decumulation might pan out in future
In the midst of a quiet bank holiday in the UK, the defined contribution (DC) pensions market awoke on Monday to see itself in a new light.
Last year, chancellor George Osborne famously bellowed from the House of Commons dispatch box that no one would have to buy an annuity and in one fell swoop changed the way the British looked at DC pensions decumulation, and pensions in general.
As the clocks turned 0900 this morning, DC pension providers could have been inundated, as they recently predicted, with calls from those over 55 wanting to access their pension savings and run riot over the notion that pensions savings should eventually become retirement income. We shall learn down the line whether they were inundated or not.
But it leads to an interesting discussion. Whether you agree with the reforms or not, they are here. What happens henceforth is what is important – whether you believe in ‘paternalism’ or liberalism, market forces or intervention. The gates of pensions freedoms have been opened, and it is likely savers will come flooding through.
So, what next? No one really knows. No one has been able to predict how savers will react. The pensions minister Steve Webb spent his Easter weekend entreating savers not to wake up today and splurge their savings before even considering retirement.
Webb, true to his Liberal Democrat colours, stands by the view that savers should have the right to do so – and this, really, is the core matter. Liberalism always comes at a cost, and that cost is bad decisions – sometimes bad decisions created by coercion. The policy of forcing people to buy an annuity is based on the notion that they cannot be trusted to make the ‘right’ decisions. This government argues that only the people themselves know what is right.
The abandonment of the so-called nanny state in pensions, however, exposes savers to a new and potentially bigger predator – the pensions and insurance industry. With freedom and choice to select retirement solutions comes just that – choice. The UK industry is already complex enough to the general public, with splits among defined benefit and DC, trust-based options and insurance contract-based arrangements. It’s complex enough to see pensions saving continuously fall until state intervention in the form of auto-enrolment. Adding choices, while giving people freedom, merely increases complexity, not to mention opportunistic sales tactics from shareholder-bound, return-driven firms.
To its credit, the government has provided free guidance, but the question of whether enough resource and emphasis on this guidance has been provided is debatable, as the entire policy hinges on the ability of a saver to select the right product, at the right time and at the right price.
The policy is difficult to argue against and, more important, difficult to redact. Freedoms are popular. Webb himself, in a debate with his opposite number in the Labour Party, said the polls spoke for themselves.
However, there is the bigger concern. Liberalism, even with its costs, can be welcomed, but one should always look at the motives. The freedom to spend one’s DC savings is one of the biggest, and certainly most popular, policies of this government – and it comes into force weeks before a general election. Short-term electioneering over long-term concerns for the electorate? Perhaps.
The next government, whatever its form, has much to contemplate. More intervention to fix its freedoms? Rules around targeting customers? Cost caps for new products? Extending the freedoms to those already with annuities? All of these have been discussed. Momentum behind the notion of having a default decumulation option is building. The idea is to help those who just do not know what to do while still providing freedoms to those who want to exercise them. MPs scrutinising pensions policy, the National Association of Pension Funds (NAPF), the National Employment Savings Trust (NEST) and a think tank all support this idea. However, the current pensions minister is strongly against it.
After much talk over the last 13 months, the day has arrived. Pension providers opened themselves up to a raft of enquiries this morning. The reforms can help create a more active, fluid and beneficial pensions industry where people get out of it what they desire. But only time will tell if freedom and choice was truly the right way, or whether the UK government merely replaced a nanny with a shark.