In its Retirement Incomes Review, the FCA has found that consumers welcome the pension freedoms. The FCA does however express concern about: a lack of product innovation, annuity providers leaving the annuity market, a lack of trust in pensions, and consumer behaviours. The FCA promise to do some more work to address their areas of concern.
The report in itself is a good read and provides many useful insights into the pension income market. However it is not a Retirement Income review. The review looks at pension products and how they are used in the post-pension freedom world but it does not look at this world through the eyes of the consumer.
One of the issues it does raise is early access of pension pots and how this has become the ‘new norm’. In that sense, the report is very strong on the ‘What they did’ but unfortunately not very much is included on the ‘Why they did it’ aspect.
We know that 72% accessed their pension pots before the age of 65; 53% of pots accessed were under £30,000 of which 94% had other sources of income in addition to the state pension – 24% of which saw their defined benefit (DB) pension as their main source of retirement income. If we knew the ‘why’ then the majority of the decisions made by those individuals may be deemed sensible.
The terminology used indicates a shoehorning of the pre-pension freedom world into the new world. Firstly, how many of those who accessed their savings now look upon those ‘pension’ savings as a pension. The dictionary definition of a pension is: ‘An amount of money paid regularly by the Government or a private company to a person who does not work anymore because they are too old or have become ill.’
The people mentioned above in the research have not received a regular income, may not have stopped work and may not be too old for work. Maybe, in that sense, the mistrust of pensions that the FCA appears to have uncovered is due to the consumer not seeing their relevance.
I recently saw an article saying that many people aged 65 to 75 object to being referred to as retired and were looking for more acceptable labels. To retire is what you do to prepare for sleep; if you are living a very active life then you take insult by being referred to as retired. By not saying on the tin in simple terms what the product does is probably a source of a lot of pensions mistrust.
So why shouldn’t we rename the product, for example, we could call it a later life savings account, and clear water would be created between it and defined benefit pensions. Plus the toxicity of pension deficits, for example, would not affect that product.
What other industry would continue to present its products in a way that does relate to how consumers see themselves, and use a name that is not relevant to how their customers use it? It is very similar position to ‘Southern’ referring to itself as a railway when many of its advertised trains are cancelled.
The cancellation of trains is a neat connection to some other points the review makes. For cancelled trains read a reducing number of annuity providers. For the delay in introducing new train staffing arrangements read a lack of product innovation. In the current economic climate annuities are perceived as costly. I personally believe annuity sales will increase if interest rates recover but the market may be more focused on older ages where mortality pooling has a distinct effect. It may take several years to get to that position.
Product innovation took a backward step with the withdrawal of Met Life from the UK later life income market. The economic situation makes it expensive to provide guaranteed products and consumers are averse to paying the cost of those guarantees.
It is hard to envisage what other product innovations the FCA is looking for. I would look at Australia and the US to see what’s going on there – do they have decumulation products that are different to those available in the UK? They certainly have many more years experience of pension freedoms.
What the FCA has not honed in upon is services? My definition of services is one that covers what it is you can do with your pension product. How many providers offer partial Uncrystallised Funds Pension Lump Sum (UFPLS)? This will increase the ways consumers can access their pots providing more solutions. But services go wider. By the time a person begins to wind down their working life they may have accumulated wealth in various types of pensions, their home, ISAs, shares and a range of other savings and investment products.
They will have many different personal strategies for their futures. Their spending patterns will therefore vary. The art is to help them find the best way of using their varying sources of income, in the most efficient way, to fulfil that spending whilst managing the risk to their future.
This is the service innovation that is urgently required. It may lead to full advice, patterns may develop that lead to product innovation to meet demand but it will be customer not product driven. This would also solve the FCA’s final concern, consumer behaviours.
Bob Champion is chairman of the Later Life Academy (LLA)