Plans for transfer rules undermine freedoms
For intermediaries only
Requiring pension freedoms users to transfer their funds into a workplace pension scheme could damage savings further, says Baroness Ros Altmann.
The Financial Conduct Authority's (FCA) latest recommendations and consultations have profound implications for pensions. An issue that is, rightly, high on the regulator's agenda is defined benefit (DB) transfers.
Central bank"money tree" policies have driven down long rates, increased transfer values, and depressed annuity rates. This has dramatically increased transfer values and more members are leaving their ‘guaranteed' pensions.
This leaves pension savers at risk of poor outcomes when they move into - potentially unsuitable - defined contribution pensions. Some have been enticed into scams by rogue advisers, but the FCA seems particularly concerned about the impact of the fees of independent financial advisers (IFAs) for transfer advice and ongoing annual charges for pension investments.
These concerns are valid, but the proposed solution seems to me to be suboptimal. The recommendation that DB members would be better-off transferring into workplace pension scheme default funds, rather than personal pensions, expose members to different dangers.
I can see the attraction to government, regulators and traditional workplace pension providers of boosting workplace scheme assets. For example, this could increase NEST's assets, help master trusts achieve scale more quickly, and increase profitability for traditional workplace providers - and regulatory oversight is easier than for personal pensions.
However, workplace default funds may not be best equipped for pension freedoms. There has been an alarming lack of new products and services - both for accumulation and decumulation.
Someone in their 50s transferring a DB pension to a default lifestyle fund will be moved increasingly into cash or lower expected-return assets because they are within ten years of the scheme's pension age. If they plan to keep working, and do not withdraw money straight away, they would pay up to 0.75% a year, while giving up long-term return prospects of their pension investments. Paying somewhat more for higher expected-return investments and professional advice that stops them taking their money out too soon, or paying unnecessary extra amounts of tax, does not seem to have been factored into the FCA analysis.
The idea of Freedom and Choice was precisely meant to be given freedom and choice. If that just becomes freedom to move to a workplace arrangement - which may not actually be suitable and they are discouraged from using the expert advice they need - then the rationale for transferring may be undermined.
Ideally, people need financial guidance from PensionWise first, to help them understand the risks and implications of DB transfers and then be encouraged to get financial advice to help them set up the right type of pension for their circumstances, with an appropriate long-term investment horizon. Even at age 60, members can have a 30-year time horizon, whereas workplace"target date" or"lifestyle" default funds would move their entire fund into cash or near-cash.
The pensions industry has traditionally been based on"one size fits all" standard products, but that is not how pensions work best for people. Turning freedoms back into a narrow option removes the benefits of flexibility to cope with each individual's needs.
People ideally need advice to plan their later life income carefully at least from their 50s. But if they are just switched into a workplace pension scheme's default option then they will not have the help they need. There may be less downside but there will also be less upside.
I certainly think self-invested personal pension products need better regulation, including full transparency on charges and considering banning unauthorised investments. But favouring workplace pension default options surely undermines the opportunities offered by the new flexibilities.
Pensions are not just about products and money, they are also about people. Making pensions fit into people's lives better and enabling them to manage their pensions to suit their own needs, should be the aim for providers, policymakers, regulators, and advisers.
*Baroness Ros Altmann is a former pensions minister.
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