In advance of tomorrow’s debate on funding retirement, we asked our panelists to give us their thoughts on the current state of play in the pension industry. First up, Stephanie Condra, Retirement market strategist at AXA IM
We’ve been good. A few months into the year and investors were given the gift of pension freedom and choice. All the good girls and boys across the UK that have been diligently saving their money for retirement now have the full flexibility to choose whichever investment solution they think will give them the best outcome.
I bet your elves are busy building investment models for the financial engineers and designing new income products for the asset managers on your ‘nice list’! What do you plan to put under the tree for annuity providers?
As for us, this year our retirement Christmas wish list should probably be sent to the Financial Conduct Authority (FCA) or HM Treasury. I won’t ask for much this Christmas, just a few small things…
- A post-retirement default strategy. I finally got around to reading the book Nudge that you put in my stocking a few years ago and it got me thinking that Thaler’s principle could be applied to the pension system. The nudge principle suggests that systems should be designed to protect investors that are likely to behave irrationally, while still allowing rational investors the flexibility to choose the option that best suits their situation. This would suggest that a post-retirement default investment solution – which investors could opt out of – might address concerns about lack of pension scheme member engagement. I see that you found a way to deliver this gift to investors in Australia earlier this month so I guess there’s hope that there could be another one of these in your big sack of gifts for us!
- A focus on income, not net worth. I know that it’s not the size of the gift, but what’s inside that counts and the same can be said about retirement savings. Instead of focusing on the size of the pension pot, we’d like to see greater focus on what that pot can do – i.e. the amount of income it is expected to provide. It seems like a subtle difference, but there are significant consequences for investment choices and risk when this objective changes. This past summer, Robert C. Merton released a great paper in the Harvard Business Review on this topic and the recent changes in the Australian system appears to be following that philosophy. A simple solution here in the UK would be to change the way we talk about retirement savings – to reference it in terms of expected income instead of expected pot size.
- A reversal of the decision to allow Defined Benefit (DB) to Defined Contribution (DC) transfers. I bet you’ve been scratching your head on whether this decision belongs on your ‘naughty’ list. Most investors would struggle to find a solution available in the market that can deliver the same security, guaranteed level of income, burden of risk, governance structure and fiduciary oversight as a private DB pension provision. Yet, the government went ahead and removed all barriers for DB to DC transfers – not even limiting them to exceptional circumstances like in the public service. While increased flexibility is helpful in a DC context when investors have full responsibility for the risk and outcome of their decisions, it is not as easy to rationalise the case for increased flexibility for accumulated DB benefits.
- “Guidance service”* statistics and user feedback. Yes, this is technically two different requests, but I imagine that they would come together in an FCA gift pack. It only seems reasonable that the providers that are funding the service would be given information on its usage and usefulness. These kind of statistics can help all industry stakeholders to assess whether value is being delivered in return for the funding that is being generated.
- A review of the guidance service* levy. From the start it has been our view that the guidance service should be funded – at least in part – by those who it is designed to benefit most: the end investor. If the question of ‘who benefits most?’ is still being assessed and if a reduction in the levy applied to financial advisers was part of the solution, maybe a member levy is not completely off the table. If anything, we hope that there will be a commitment to review the structure and allocation of the levy within the next three years, based on a reasonable assessment of the use and benefit of the service to members and to the industry. This wish list item is like the pony that keeps being added every year. I know that it’s unreasonable to expect such a big gift on top of
(PS… I was also going to ask for a Lamborghini, but I wonder how long the waiting list is these days?)
*The UK government announced in the Budget earlier this year a service guaranteeing free and impartial guidance for all to help people make decisions on pensions choices.
Please remember the value of investments and the income from them can go down as well as up and you may not get back the full amount invested. If you are unsure about an investment or retirement product please speak to a financial adviser.
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