Pensions are dead simple; they are a 60 year deal where money goes in for 40 years and gets taken out for another 20 – Decumulation refers to that joyous part of the pension journey where you switch from putting money in to taking it out.
In the good old days when patterns of employment were more straightforward and employers more altruistic most of this happened in one company but today, of course, most people have a number of employers. The Office for National Statistics (ONS) report that the average number of employers is 7 over a working lifetime where ‘Employer’ often including themselves; there are about 4.6m self-employed today and the over 50s account for approaching half of them.
Again, in the good old days, we got to retirement age (whatever that was for our particular scheme – the default was 65 for men and 60 for women) and took the benefits in the form of a lump of cash and a regular taxable income for life. That has been changing for some years but new and significant changes to the way we can access our accumulated pension funds come into force on what has become known as ‘Pension freedom day’ in April this year.
These changes mean, in effect, that anyone outside the unfunded public sector schemes such as the Civil Service, Teachers and Armed Forces can take pretty much all their accumulated pension pot from the age of 55. The detail relating to taxation and mechanics are, as is usual with pensions, anything but straightforward.
When announcing these changes there was some recognition that the complexity and opportunity offered to tomorrow’s putative pensioners necessitated a bit of help and the chancellor managed a great sound bite when he stood up in the House of Commons and announced that 'everyone will get face to face advice at the point of retirement.' But what did this actually mean?
Well, it obviously didn't mean 'advice' in the way the FCA means it; no personnel recommendation would be given and there was never any intention of making the 'advice' regulated or subject to the usual consumer protection safeguards.
We now know what he meant was a 'guider' will provide (maybe face to face or, for most people, over the phone or online) generic 'guidance' pointing out some of the options available and signpost where to go next. So far so muddled.
After a period of uncertainty we now know that ‘guidance’ will be provided by the Citizens Advice Bureau (CAB) and the Pensions Advice Service (TPAS). Both are well run and highly credible organisations who have accepted the challenge but most commentators recognise they will struggle with the volume of enquirers looking for 'guidance'. We won’t mention the 'Money Advice Service' who didn’t get the gig despite having absorbed a huge amount of cash.
The ONS report that 75% of males in the 55 – 59 age group are still in paid employment paying NI contributions falling to 55% for those in the 60 – 64 age bracket. The ONS also report that only 22% of the self-employed contribute to personal pensions with 41% of the employed in some kind of occupational scheme. The ONS data shows something like a third of people come to the state retirement age with little more than the state benefits including the state pension to live on. To summarise, no one actually knows how many people will want to use the new ‘guidance’ service and what they will look like - but it will be ‘a lot’ (best estimate is around 20,000 per month). What is less uncertain is many will be confused and at least some will have unrealistic expectations.
So the point is we are about to enter a whole new world of decumulation with a load of complex considerations to do with tax, longevity, investment returns for different asset classes, and administrative efficiency - and the pension industry has had barely time to read the legislation let alone design the necessary processes and software. This is likely to result in disappointment and confusion as consumers realise they can’t get what the politicians have promised them.
In this context it could be argued that the market divides between those firms such as intermediaries, wealth managers, and pension wrap providers catering for the small minority of wealthy individuals who have managed to accumulate well above the median of pension assets (say £250k plus) primarily in some kind of personal pension and ‘the rest’ who are in occupational DB and DC arrangements.
Our view is the changes are likely to benefit the first group far more than the larger second group. If you haven’t got much money in pension schemes (say less than the new de minimus figure of £30k) then the rules are largely irrelevant and for those in occupational defined benefit schemes there isn’t much possibility to take advantage without considerable perturbation.
However, for occupational DC, there is an undoubted opportunity although the amount of money is such arrangements is a lot less than occupational DB.
So, it seems to us that this all provides considerable opportunity for tech firms to come up with tools and other guides for consumers on a D2C basis - plus an urgent requirement for providers to offer pension admin solutions covering the basics such as illustrations of the various options plus the ability to actually implement the new decumulation options for occupational DC.
Pension admin just got a whole lot more interesting and not just for the pension anoraks like me.
By Chris Robinson, Managing Partner, Contrado Consulting and bobsguide Contributing Editor