1. The role of annuities in a world of pension freedoms
2. How pensions can work alongside later life solutions
3. The importance of state pension as part of overall retirement provision
Tutors on the panel are:
Steve Webb, Former Pensions Minister
Martin Lines, Head of Business Development, Partnership
Simon Massey, Wealth Management Director, MetLife
PRESENTER: The UK pensions landscape is undergoing massive change. The man responsible may no longer be in government but he is here with asset.tv. Welcome to the future of pensions. Joining us today are Steve Webb, former Pensions Minister; Martin Lyons, Head of Business Development at Partnership; and Simon Massey, Wealth Management Director at MetLife.
Steve Webb, the government has done a lot of change on pensions over the last four or five years, does it still have a hunger to do more change, or is it job done?
STEVE WEBB: I think what we tried to do was put the key building blocks in place. And I think most of those are in place. So I think the state pension needed sorting, it’s been simplified, contracting out ended, a firm foundation. We needed membership up, 10 million more people being in auto-enrolment pensions by the end of the decade. That’s a huge achievement. We need to regulate that so that there weren’t scandal headlines and rip off headlines, so hence the charge cap. And we needed to do something to give people freedom once they built up a pot, hence the freedom and choice agenda. Tax relief, which was obviously never my responsibility otherwise I’d have fixed that as well, there’s still clearly work to be done, outstanding business. So actually a very green green paper putting it on the table saying let’s do this thing properly.
I think those are most of the big picture items. Clearly there’s always detail, and the world changes so there will always be detail changes. But if we can get that building block in place I think it will survive changes of government, and give some long wanted stability.
PRESENTER: You said we needed freedom of choice, was it as big a surprise to you when that came out of the Treasury as it was to a lot of commentators?
STEVE WEBB: No, not at all, I mean I’ve been arguing, I think I’m in Hansard arguing for annuity reform in 1999, so slow burn but we got there. And I think the key thing, I’d been pressing the Treasury to act because annuities again were a Treasury thing because it’s all about tax, and they were doing nothing, and I was having trouble selling auto-enrolment as a concept because it ended up with an annuity and “we all knew that was a bad thing”. It’s not but the reputation of annuities was so bad we were struggling with auto-enrolment. And so I was levering and levering the Treasury into action, and then in the run up to the 2014 budget it became clear that we were going to get action, and I helped to shape what was said on the day. And by and large it’s landed well I think.
PRESENTER: And the final piece of the puzzle seems to be this green paper that’s out, which is in many ways suggesting perhaps we don’t need as many tax breaks to encourage people to save, not least because pensions are compulsory. What’s your take on that?
STEVE WEBB: What some of these, as recently as April the Conservatives were saying we’re going to fiddle around with higher rate relief to pay for some inheritance tax cuts, but after that there’ll be no changes in pension tax relief for the whole Parliament - by July open consultation. So something moved, and I think possibly it was the thought of cash up front. Stop tax relief now, promise people we won’t tax them in a generation, honest guv, and then maybe there’s billions to be had. And I think the Chancellor was open to that possibility. Personally I think it would be a mistake to go down the ISA route. One of the problems is tax in retirement acts as a brake on withdrawal, so it’s a brake on the Lamborghini if you like. And if you take that away we go TEE and EET and flip it around, then if when you take your money out your pension the whole lot’s tax free, well why wouldn’t you?
PRESENTER: Well let’s open this up. Martin, if I can bring you in here. I mean have you put in a response to the green paper? What would you like the Chancellor to, and the Pensions Minister to do on pensions?
MARTIN LYONS: Well it is interesting. I think that we have heard from Ros Altman as well a similar sort of view that actually taking taxation away from receiving benefits could encourage people to take benefits earlier than they might otherwise do, because of the freedom away from tax and so forth. It seems to me that whilst there wasn’t much consultation before the Taxation of Pensions Act, a lot of it seems to be going on now really. So the horse has bolted, freedom and choice is a great thing if used wisely and so on. But now we’ve got all the consultation around if you like some of the fine tuning. Has access been easy for people, what are people using their funds for, is there an advice gap? We’ve got the financial advice market review set up by the Treasury and FCA to look at are people getting the right information and advice and so forth? Does Pension Wise go far enough? Where does advice step in, is there a gap between the two, and so forth.
So I think there’s a lot going on. We’ve had the FCA’s paper on vulnerable clients also, not least of all looking at things like the education of the UK in terms of their financial awareness. And whether that makes people susceptible to financial detriment, which I think is a really important point. Clearly there will be people that may well make mistakes given the freedom of choice, and we need to be mindful of making sure that people are as protected as they possibly can be.
PRESENTER: Simon, how easy is it work out what your strategy should be, what your products look like and to do the best job for advisers and their clients when here’s all this devil in the detail still to come?
SIMON MASSEY: Yes, I mean that is a challenge. I think the freedoms and the reforms that have come in have been broadly welcomed as being a positive step forward. I think the difficulty is that the industry configured itself over decades around annuities, which have evolved over that period of time with underwritten annuities, investment linked annuities, to really be quite a sophisticated product. We’ve seen the introduction of drawdown in 1995, so a 20-year history of drawdown alongside annuity. But all of those propositions really geared around a single purpose, which is income provision. And actually the game changed on the 6th April because no longer was income provision the sole objective now of clients and advisers, but of course we’ve got this additional objective. Whether it’s realistic is a different point, but we’ve got this additional objective of I might like to gain access to some capital, whether that’s immediately or at some future point I would like that option.
So I think at the moment product providers are embarking upon reviewing how they can best satisfy the needs that this new market dynamic has created. And I think I’ve also observed advisers starting to rethink their advice processes to make sure they’re building in the additional requirement of flexible access. And I think that’s quite important because with the increasing life expectancy it might be very easy as a relatively fit new retiree to think you’re set fair, and actually to find there’s a change in circumstances and you might need for example to make some home modifications so you can stay in your home, which might only cost a number of thousands of pounds and flexible access could be a key requirement. So I think we’re seeing an emergence of strategy from providers and advisors alike, and I think there’s probably a lot more to come.
PRESENTER: But how much time Steve, when you were in government, were you thinking about how, not just the big picture but how that actually would affect the market, and the dilemmas that product providers and advisors and schemes themselves would face as you dictate from the top and then it all works its way through the system over two, three, four years?
STEVE WEBB: We’re clearly on a journey. Someone referred to the start of the reforms in April as the beginning of a decade of innovation, and more no doubt. So clearly from day one everything wasn’t going to be in place, and it’s only once things are in place, and I think the industry spent a year just getting the IT to work to be honest, and making sure they were legal and compliant. And the FCA recently produced some research that said the majority of providers were planning to bring forward new products in the next six months or so. So I think there’s a lot still to change. What I never tried to do in government was design products. I’ve never designed a pension product in my life, and I don’t think I should start now, unless my future employer asked me to. But what I try to do is create a framework.
So for example take the example of the state pension. Auto-enrolment would have failed if we hadn’t reformed the state pension, because the state pension was so low that people with small private pensions were just depriving themselves of means tested benefits. If you’ve got £20 a week pension I’d come along and say oh you’ve got £20, that’s £20 of pension credit I don’t have to pay you. And then people would have said well why should low earners be auto-enrolled? And so I had to try and get the building blocks in place, get a state pension clear of means testing, make auto-enrolment land successfully, and I think we did that up to the first million or so. Make the product at the end, the options at the end popular, and then allow the market and the providers to innovate. And yes, equip consumers through guidance and where appropriate advice, but not to try and be prescriptive.
PRESENTER: And do you think we’ve gone from having a pensions culture environment now to an investment culture environment?
STEVE WEBB: Yes, I mean I don’t get hung up about the word pensions despite my former job title. For me it’s about quality of life when you don’t have a wage. That’s what this is all about. And the point about relaxing the obligation to annuitize is to say quality of life in retirement as we’ve just heard could be about the reassurance of knowing you’ve got some capital that you can access, and I do think this point about retirements lasting 20 or 30 years is really critical. We get hung up on 55, but actually we will need to think much more about what do people do at 75, are we still expecting them to make financial decisions? Perhaps annuities still have a place but it’s later.
You know, I think the key thing here is to say everybody’s different. A simple and obvious example, most people when they retire are married or part of a couple. So actually your financial needs, what you’ve got coming in will be very different if your part of a couple, two state pensions, a bit of old DB, a number of DC pots, as against if you’re a single person. And yet the rules used to force everyone down a single channel, and that just can’t be right.
PRESENTER: Simon, do you think annuities are dead?
SIMON MASSEY: No I don’t. I think, as I mentioned before I think annuities have evolved over the years. I think they do their job extremely well for the right segment of clients. And for those clients who perhaps need a stable guaranteed income to rely on, and have little other assets, and possibly the realistic prospect of accessing cash lump sums if we’re brutally honest is non-existent because their pot size may not be big enough, I think there are segments of clients where they do the job extremely well. I think where we’ve seen perhaps annuities get caught by some more negative publicity, is where perhaps they’ve been often a default option and it’s not always clear that the suitability of them is appropriate. But I think where there’s an adviser engaged in the process with a client, setting them up for retirement and matching the benefits of an annuity to the suitability of that client, then they do the job they’re designed for well.
PRESENTER: But Martin, given how low interest rates are at the moment, can you get a meaningful income from an annuity?
MARTIN LYONS: I think there’s more than just the rate to look at. I mean one of the things that the consultation or the review of annuities did back in early 2014 was specifically look at, as Simon says, those providers that were offering that as a default, or effectively holding on to existing consumers. And really the focus of that report was on the value that those individuals were getting, particularly if they weren’t shopping around the marketplace and using the open market option. When you do use the open market option the rates are somewhat better than they would be if you’re necessarily entering a default situation.
The FCA did some research or commissioned some research in December 2014 to really look at well actually are annuities poor value, what does value actually mean? Is it just a case of looking at the rate you’re getting, or actually do we need to redefine this and make sure people understand what we’re talking about, here is an insurance contract and not an investment. Are we actually comparing eggs with eggs? And they looked at some research that basically said well here’s the purchase price of the annuity you’re buying. For an average life expectancy how much of that do you get back, taking into account gilt returns and so on and so forth? And actually their conclusion was that annuities could be very good value, particularly compared with other retirement income strategies.
So I think a lot of the research was done after those announcements were made. You also have to think about not necessarily just how much of an income somebody’s getting, but the way that income is framed. And again there’s been several papers out now talking about really nailing down this is an insurance not an investment. In other words if you say to somebody here’s an investment that we’re going to make. You can only take the income from it, you can’t get your hands on the capital - funnily enough not that many people want an annuity. If you say here’s a guaranteed income for life and it will be payable for as long as you live whatever happens - funnily enough the answer is very different. And yet the conclusion is exactly the same.
My view is that people need an element of fixed income or escalating income, but some form of guarantee that will actually cover the direct debits, cover the bills in retirement.
PRESENTER: So it’s a hierarchy of needs, cover the basics off with a guaranteed income, and then…
MARTIN LYONS: That seems to make sense to me, because you’ve got insurance and investment, and I think both are as important post retirement as they are pre-retirement.
PRESENTER: And Simon, do you see things like guarantees or quasi guarantees coming back in, because for a long time the insurance industries wanted to run away from that?
SIMON MASSEY: I think that’s right. I think we’ve conducted quite a bit of research since the Chancellor stood up at the despatch box and announced the changes were coming last year. And we’ve carried out that research with customers to understand well what actually is it they want in retirement? And to a certain extent it’s not a surprise what we’ve discovered. They want a combination of flexibility, given the new freedoms, so no surprise there, but certainty in the form of guarantees was very high up the list. And we didn’t ask the questions in a way that said do you want a guarantee, because the answer to that is of course I want a guarantee. But do you want a guarantee and are you prepared to pay for it is a more helpful question to ask. And customers are clearly prepared to pay for guarantees.
PRESENTER: How much? What’s the difference what a customer thinks a guarantee is worth, and what the actual cost of a guarantee is?
SIMON MASSEY: Yes, well we’ve tested a number of different price points as part of the proposition design work that we’ve gone through. And we’ve tried to make sure that we can now deliver guarantees through a much more product innovation, in a significantly cheaper way than they’ve been able to be manufactured in the past. And we believe this is part of the innovation that new pension freedoms are looking for. So this is, so we’re in the market with propositions that deliver guaranteed income for life or guaranteed capital, combined with flexible access for a client’s total pension holdings. Now again I would come back to say suitability is the key here. If that’s suitable for a client that delivers against those requirements of the certainty, the flexibility and the value for money.
So I think providers will make their own decisions. I think some of them will not want to take guarantees onto their balance sheets, and that’s a decision for them to make. Others with the expertise in risk management will be able to manufacture them and have got a track record of doing so.
PRESENTER: And without going into your product in detail, this is a risk you’re putting on your balance sheet, not re-insuring somewhere else in the market.
SIMON MASSEY: Exactly yes.
PRESENTER: Steve, given all of this, we’re talking about the issue of how you can generate enough income, to what extent does this actually come down to where the markets are? I mean we’ve got a whole system of pensions that however it’s developed over the last 30 years has done it on the back of a bull market and bonds, and some fairly healthy equity markets. There’s quite a lot of thought out there that this might come unstuck at some point in the next few years. Might you have created an entire system that just isn’t fit for purpose?
STEVE WEBB: I guess if you think about working lives and retirements both getting longer. So as we raise state pension ages the typical working life could be 50 years, the typical retirement could be another 25. So yes, there’s going to be bull markets and bear markets and ups and downs, and we need to educate people. One of my worries is that everybody will have an app sooner or later, and it will have the daily, hourly balance on their pension fund. And that’s dangerous actually if people don’t understand what to do with that information. So we do need to think that one through. But one of the paradoxes of auto-enrolment is certainly when you start people aren’t engaged at all.
I think there’s some survey evidence out recently that said most people haven’t got a clue what their money’s invested in. And in the early days that’s probably not such a bad thing actually, because if they’re terrified by the short term ups and downs they might pull out of pension saving. And indeed when NEST designed their investment strategy for the 20-somethings, they counterintuitively went for a very cautious early strategy, because their research showed that the 20 somethings were very loss averse. That if they lost money in the first few years of pension saving they just never trusted again. So what NEST have done is said right, early on we’ll be very cautious, very conservative, and people will see a pot rising each year, not excitingly but rising, and then they’ll get a bit more educated. And then if it goes down one year they can live with that. So there is an education job to be done here certainly.
PRESENTER: Is it true that all of you as you’re talking are talking a lot about the psychology of those buying products, how influenced are you by books like Nudge and this whole behavioural element that seems to have really opened up in the last five or ten years?
STEVE WEBB: It’s astonishing the impact of apparently minor changes, not just in defaults, defaults are very important, but in the way that things are framed as we were just hearing earlier on. So for example HMRC managed to up their tax take just by putting a sentence in their letters that says well everyone pays their tax. People like you pay their tax. I was the Minister as well as responsible for pensions, for child maintenance, getting non-resident parents to pay maintenance for their kids. And we tested lots of different letters. And someone suggested to me that we should text photographs of the children and say this is who it’s for. It’s not your ex who you hate, it’s for the child who you live kind of thing. It’s early days but I think at a time when government has no money to spend, and is trying to do more for less, being clever about what government does is essential.
PRESENTER: I want to talk through some of the implications of pensions freedoms, I mean we’ve only had a few months of them Simon, but what are the early indications on how wisely people are spending it? Because you’ve got this sort of paternalism at one end versus…
SIMON MASSEY: I think, I mean it’s been mixed I would say. So we’ve seen quite significant numbers of people in cash in. The difficulty is we don’t know their situations to know is that a good thing to do or not. I think there is still a need for further education, because certainly anecdotally some people have cashed in their pension and put the money into another investment, which may not be, depending again on their situation, may not be the smartest thing to do. So I think we’ve seen a little bit of that. I think the general heightening though of the fact that pensions are now more flexible, we’ve seen an interest now and people engaging a lot more with pensions to make sure they can take advantage of freedoms by actually funding their pension better, which is good news.
So I think it’s mixed across the piece in summary in terms of what we’ve seen. And I suspect we’ll see, you know, as people become more informed about how to use their pension funds to provide this sort of combination of guaranteed income and flexible access, I think we’ll probably see the dust settle a little bit more as well.
PRESENTER: Much evidence of people wanting to trade in their annuities?
MARTIN LYONS: It’s an interesting one. Well indeed, that’s been pushed back now until 2017. The Financial Services Consumer Panel have got a lot to say around the second-hand annuity market. This idea that actually if you feel that you bought a poor value annuity in the past and maybe you ought to trade it in, in principal seems like a reasonable idea; certainly if that produces a guaranteed income stream for a provider to use to secure benefits or whatever it might be. There are some difficulties with it of course. Because what you need to make sure is that again there isn’t a potential for consumer detriment. And that’s one of the key concerns that the Financial Services Consumer Panel have been talking about. If you’ve got a low level of income from the past, and you’re looking to trade it, well what sort of capital value are you going to expect, and actually will that meet your expectations or not? What they go on to say is that most financial advisers would probably advise not to trade in your annuity.
So I think one of the things is there definitely needs to be some sort of advice process around that, to make sure people are getting go0od value and actually doing the right thing.
PRESENTER: Steve, on that point, I mean you were saying earlier you’re not a designer of product and now is a bad time to start. Does government see itself as a designer of markets?
STEVE WEBB: Well this was a market I wanted to create. So we had all the excitement of the freedoms, and then there are all these millions of people out there saying hang on, what about me? I was forced to buy an annuity last year, the year before, it wasn’t what I wanted, it doesn’t fit. For example again coming back to my example we’re a couple, we’ve got two state pensions. That’s £12,000. My husband’s got a DB pension, we’ve got other pots, this DC part I’d just rather have the cash, and you made me buy an annuity, can I not just sell it? And I think the key to making this market work, and we do need consumer protection, is a lot of buyers. We need to have lots of people bidding for your annuity. And I think one option is to have a portal, so a single place where you can sell it, single place where buyers can go, a set of standard information about the annuity you’re selling, the characteristics of the seller and so on, some basic health information, that kind of stuff. And then some competition, potentially an anonymised process, because I would like the seller of the annuity to be able to buy it back, but there are issues about if that’s done direct.
So I think actually letting, if I bought an annuity from a provider, they ought to be able to bid on this site for any annuity that’s offered, even if turns out to be one of their own. I don’t see there’s a problem with that. And if we can do that actually I think some people might get a nice surprise. Because when they bought the annuity say five years ago, interest rates were so much higher. The income stream they’ve got now would cost a fortune to buy. So yes they’ve had five years’ worth of money, the seller’s taken a turn when they did it. But they might get a good amount back. If they’re happy, if this becomes an asset that insurance companies, pension funds and others can use, then as long as we can just keep an eye on that market and manage it, why not?
PRESENTER: Isn’t there a danger though that for every person in that market who gets a good deal, the one at the other side is going to complain down the line and say oh this is disastrous, it got missold, misbought, I didn’t really understand what was happening? It’s a can of worms.
STEVE WEBB: Well there is a can of worms about original miss-selling of annuities. So FCA are looking at that now.
PRESENTER: But if everybody had to buy an annuity it couldn’t have been missold could it?
STEVE WEBB: Well you could have got the wrong one. So you could have got through not shopping around, but more than that the enhanced annuities and so on. There are horror stories of people with terminal conditions being sold level annuities and so on, and just ordinary ones. But I don’t think we say to people who have bought an annuity, whether missold or not, well you’ve got to lump it because actually we might open a can of worms if we let you sell it. Actually if it exposes the fact that some people got a raw deal that would probably be a good thing.
PRESENTER: Well we touched on the advice gap a couple of times. Martin, are you worried about the advice gap on pensions at the moment, and what can advisors do to fill it?
MARTIN LYONS: Well this is all under review at the moment in the financial advice market review. And there are a number of other things that are going through. There’s a consultation on charges cap, access to funds, transfer charges and so forth. And whether some of the stipulations are a step too far in terms of where advice is needed and where it isn’t needed. And there are these conflicting situations where a lot of the press comment initially has been I need to get my money, I want to get my money, need is probably the wrong word, I want to get my money from a pension. I’ve been told I need to take advice. That’s going to cost me X amount. And we’ve even heard of advisers who are getting phone calls asking the question how much would you charge me for a letter to say I’ve had advice. And then the phone going down when it’s too much and these kind of things.
So I think it’s a real challenge, particularly defined benefits is a particular area where you’re going to have to have advice in most cases if the fund is over a certain size. And a lot of people are saying well actually I just want to take my cash out. And there’s a risk, not only for the individual in terms of giving up defined benefits, a fixed, or a guaranteed income for life. There are also some concerns that advisors have in terms of the risk of providing transactions for insistent clients. So it’s a bit of a minefield that whole area really, and it’s all currently under review in terms of what is the best way forward.
PRESENTER: Well, Simon, from your point of view what would you advise advisors do? Because I mean I came into this industry in the ‘90s, mid ‘90s, and at that point there was all the fallout from pension freedoms. Buy yourself a personal pension in the ‘80s, and there’ll be a lot of advisors thinking hang on, I’ve seen this come round once before. And then the amount of admin and god knows, it was huge. What can you do to?
SIMON MASSEY: I mean I think just looking at the, I mean the review first of all into the advice gap, I think we welcome that review. I think there is an advice gap. I think the way, with RDR the positives from RDR we’ve now got a better qualified group of advisers than we’ve ever had. A number have chosen to leave the industry, and I think the competence of those left behind is the best it’s ever been. We’ve got a regulatory process that provides a very good framework to ensure that clients are getting suitable advice, but it comes at a price. And I think for those clients that can afford that regime they’re getting pretty good customer outcomes consistently, probably better than ever. But I think the corollary of it is we’ve now left a significant gap in the market. Many of the banks have chosen to step back from the market that traditionally filled some of that gap. And at the moment it’s difficult to know where consumers will go to get the advice that, as Martin has described, they are often being directed towards.
So in terms of look ahead I think we welcome the review, and I’m sure there are some ways we can develop a better market for consumers. I think technology has probably got a part to play in it for many consumers as well. Because I don’t think of all of the stages of a financial advice process they necessarily need to be conducted face-to-face. So I think there are some ways that we can start to develop a better market. I think from an adviser point of view, I think they’re doing a pretty good job. I think they need to manage the insistent client situation carefully. And perhaps think how they can broaden their reach as well to different segments of customers, possibly through the use of technology as well, whilst maintaining their gold standard of advice for their paying, fee paying clients.
MARTIN LYONS: I think one of our key things here is the need for advice. And that gap is an important one, because a lot of the rhetoric around freedom and choice is no caps, no limits. And at the outset a lot of people grabbed hold of that and said well that sounds fairly simple. However, you know, when you look at things like taxation, even just tax planning, so if you’re going to take what is often described as cash, which we know a lot of the time is actually merely income from a plan, make sure the client’s aware that it may affect their means tested benefits. It may have an impact on their personal allowance. It may put them into a higher rate of tax. It may be that they’re subject to month one taxation, which means they need to do reclaims and so forth. What about the IHT situation? It looks very easy to access your pot, but actually you’re an IHT privileged environment, should you be using income from elsewhere? There’s all kinds of things that on the back of no caps, no limits, it really just isn’t that straightforward. And for most individuals there is a, or a lot of individuals there really is a susceptibility to lose out if they don’t get the right advice. So I really think this advice gap does need to be addressed.
PRESENTER: Well picking up on that Steve, to an extent is that a nice middle class problem to have? I mean when you look at everybody who’s got to take pensions in your role as government, do you think yeah they can take advice, but they’re earning £60,000 a year they’re in a completely different place from somebody who’s on £12,000 a year. There’s more people on £12,000 a year, we’ve got to sort them out first. How do you prioritise?
STEVE WEBB: Sure, in a way compulsion took away the need for advice for most people in the middle. If you’re rich and had a big pot you could draw down, and if you had a very small pot you just take the cash. And a whole raft of people in the middle had no choice and were forced to buy an annuity. And those are the people who now have choices. You’ve got a pension pot of £60,000, which is double the average but not huge. And it’s those people I suppose who have choices, who may still not value advice. My argument is that advice is very valuable. The value is here but the perception of value is down here. And what we’ve got to do is try and close that gap. Make it cheaper to provide advice, and make people value it more. And that’s one of the ways we’ll close the advice gap.
PRESENTER: Whose job is it to do that? Is it government’s job or do you look out there and see all these providers and think well they’re your potential customers, get on and do it?
STEVE WEBB: Everyone has a part to play. Clearly government has to, you know, RDR was there for a reason. This isn’t personal pension misselling all over again. You haven’t got sales folk out there getting commission on these sales. You haven’t got a dirty great government bung to try and encourage people to buy the product. Is it different. But there is still this sense that people are in this new world, they don’t quite know what to do, and for example a lot of the workplace advice that used to be there I think has come back a bit. Things like the charge cap, one of the consequences of the charge cap is maybe firms have to pay explicitly for pension support in the workplace rather than hiding it in the charge; maybe not so willing to pay.
So we’ve got to make sure that the role of the employers is crucial, because that’s the place to do things at scale, because that’s the place to do things at scale, that’s the most efficient way to do most of these things. So all right, not everyone works for a big firm, but if you can knock off half the workforce who work for relatively large firms, that would be a huge step forward.
PRESENTER: Well given that, are you interested in the workplace arena Simon, or is it more about products for individuals?
SIMON MASSEY: I think the market we’re in is products for individuals. I think just picking up on the previous point Steve made, I think whilst the way you framed the question around is this a middle class problem? I mean whether it is today or not, one of the things auto-enrolment will do is change the average pot size from circa 30 to being a multiple of that in a generation. And so this problem is going to be everybody’s problem in future. And I think there are definitely options within the workplace environment, certainly whilst people are in an accumulation phase. I think it’s more difficult when you reach retirement, because I think it’s quite difficult. I think it’s easy in the accumulation phase to say that the broad advice is you should be in and you should be saving, OK.
And there might be a variation on whether you want to do some incremental contributions yourself. But once you reach retirement I think people’s circumstances don’t neatly fit into a one size fits all approach. We’ve touched on already family situation. You then start to bring in things like what other assets they might have, what their health situation is, whether they’ve got part of the sandwich generation, they’re still worrying about aged parents themselves. So there’s a multitude of factors, of which those are just a few, that need to be brought to bear on well what is the right arrangement for this client to set them up for retirement? And I think that’s where the role of good financial advice comes in for those that can obviously afford it.
PRESENTER: But is there a danger that the cost of that financial advice, even if it’s kept to an absolutely minimum, and everybody wants to do the best for everybody else, actually outweighs, better to make a cheap wrong choice than an expensive right choice that you can’t afford. Because both of you, every time, you’ve had lots of reasons as to why it’s all a bit more complicated than that, and there’s lots of things to look at not just pensions, age, health. That’s going to cost to work through that great checklist for every individual.
MARTIN LYONS: Absolutely yes, and I think as we were saying earlier, advisers now are probably better qualified and able to give that advice than they ever have done before. But we come back I guess to this advice gap scenario. Certainly in the future we’re talking about larger pots because of things like auto-enrolment where we are in the future looking at more sizeable pots. Certainly the encouragement to save gives massive opportunities for advisers to get involved pre-retirement to make sure there is a sizeable pot in the first place. And that’s one of the key benefits I think of freedom and choice is it has engaged people more in pension savings. So that has to be good news for everybody really, in making sure we get that end of the process right as well as the at retirement so that there actually is a sizeable fund and people do feel it’s worthwhile to take advice in terms of what they do with that particular fund as well.
PRESENTER: And through retirement as well of course.
MARTIN LYONS: Absolutely yes, I mean it doesn’t just end at retirement. You’re looking now if somebody’s going to have an investment potentially right up until the end of their retirement to put it nicely, then we’ve got to think about things like long term care. And that again is a very wide advice area in terms of how do you fund that long term care? What’s the correlation between pensions and long term care funding? How is that going to develop? Because you’ve got an asset there, you’ve got a care need, how do you get hold of that asset which is in the pension fund, what are the implications of doing that? And how do you address those particular issues?
SIMON MASSEY: So just building on that, I mean I think your accusation is that we’re saying it’s complicated, and that’s because it is. And let me just give you a simple example then of somebody who unfortunately had waited for pension freedom and invested their money on the back of a Conservative election victory, everything set fair for the future, and they went into the markets at 7.1, will today be nursing an investment loss of circa 15%. Let’s assume they took year one income out and put it on deposit, 5%, so that’s 20%. So this fictional 60 year old whose wife’s nagging him to book the first holiday, because we’ve retired now darling, has actually lost 20% of his pension in six months. Yet he’s going to potentially live for 30 plus years. That’s an interesting conversation to be having over dinner when you’re being encouraged to book the first retirement holiday.
So these are complex decisions. So to say OK well drawdown looks like a good answer, well maybe it does if you’ve other resources and you can turn off that income and live on other resources while markets recover. But for many folk they don’t have those other resources. So these are complex factors, and as we’ve touched on already the need for guaranteed income as part of that solution is paramount. So I don’t think there’s any getting away from the complexity partly caused by the diversity of potential situations in retirement. But I would agree that therefore there is a need to find ways of reducing the cost of providing advice for people, because the need is only going to grow as we’ve already discussed.
PRESENTER: Well just picking up on something you were saying there Martin. Steve, obviously you were the Pensions Minister, did long term care come in on the end of that, or is that a totally, is pensions and long term care completely separate?
STEVE WEBB: There is a lot of, I don’t think siloisation is a word but it ought to be really. Even within pensions, the Treasury Minister is responsible for pensions and me, there were different regulators and so on. Long term care was Department of Health at one level, local government at another. And although I had one or two meetings with Secretary of State for Health and talking about long term care, it was very much separate. And I think for me we need to see long term care not as a savings issue but as an insurance issue. The idea that we should all save enough for the cost of long term residential care when only one in four of us or so will need it seems wrong. But we all need some sort of cover, public or private. And I think one of the challenges is it’s not clear what you are insuring. In the sense that we all know that if we absolutely have to be cared for in a care home there will be a care home. And if we have no money we know it will be paid for.
So what is it you’re insuring? Now it seems to me there are two things. I mean one is quality, so at the moment the threshold for eligibility is just getting higher and higher. The level of the need. And you will end up in the worst care home in the dingiest bit of the local authority. So at some point people will start saying I want choice and I want quality. And the other thing frankly is you’re insuring your inheritance. I think rather than say to people in 20 years’ time you might be in a care home, you can’t picture yourself that, I can’t understand that and I don’t want to think about it. But if you say look, for this premium or for this product then you can pass on your wealth that you’ve saved and worked hard for for your kids, because actually it won’t be taken when you need care. And that’s how I would sell care insurance.
PRESENTER: And for you Martin, I’ll come to you first, is long term care or that later life stage, is that something you should be covering with your products, or is that an insurance product?
MARTIN LYONS: Absolutely.
PRESENTER: Or a bit of both?
MARTIN LYONS: We do in fact. I mean you talk about the 55, 60, 65 age group, and that sort of demographic growing exponentially, but there’s even faster growth in the post 85 sort of area. And yes, when you get to the point as Steve said, you’re getting to that point of having a need, you want to ensure that if it ends up you’re self-funded because you can’t get the local authority funding or means tested benefits, whatever it might be, that you don’t necessarily want to spend all of your money that you’re going to pass on as an inheritance on long term care. So whilst the care cap, as it was called, has been pushed back to at least 2020, there are other ways of capping that cost of care using an insurance contract, an immediate needs annuity. And therefore really segmenting off that money that you can now know is going to be passed on to young Johnny, whoever it might be, in the future, because you’ve secured the full cost of care for however long it’s needed.
So there are products that do that. But I do think that people need to ensure when they look at freedom and choice, just going back to the first part of that equation, is that they’re going to actually have enough assets left at that stage of retirement, and don’t necessarily take too much out too early as we were saying before. Because you are going to have these needs in later life. The ILC did some research earlier in the year, which showed that very few people relatively speaking actually recognised the need to hold onto funds for later life. Many of them looked at the fact they might be more active in early retirement and then actually may want the income to fall away a little bit towards later life. Where actually you could argue that the opposite is true. When you have an expensive requirement for care, that’s exactly when you need that level of funding that you need to make sure is still in situ later in life.
PRESENTER: Simon, in terms of the costs involved, we’ve talked about this starting off spending quite a lot, and then it perhaps dips down in the middle of retirement. Just how expensive does it get towards the end, is there some rule of thumb?
SIMON MASSEY: Well I can only speak from some personal research I’ve done, and it was pretty scary actually when you start looking at it at a weekly level. And then when you, in the fairly brutal fashion work out how much money there is and how many weeks it’ll last, it’s quite sobering. And I think when you do conduct that sort of research, as I did recently, you do come back to the conclusion of actually it is an insurance solution that’s needed, and it would seem odd given not everybody ends up in care for everyone to feel the need to save up enough for it. So I think some sort of appropriate framework from government that insurers could then innovate and step in. And as Martin said there are some product provision already, I think there could be more of different types of propositions potentially, but I think that’s where we need to go.
PRESENTER: We are almost out of time, just going to ask each of you for a final thought on where you’d like to see pensions in about five years’ time. I’ll come to you first Simon.
SIMON MASSEY: I think a stable environment from government to allow, well I think everybody, when I’m saying everybody I’m talking customers, advisers and product providers to move forward with a degree of confidence. Whether that’s saving, knowing that I know the regime that applies to my savings, and how I’m going to be able to draw it down. Providers to continue innovating, and I’m talking about beyond solutions that we’ve had for generations, but really innovate now into this new world to deliver what customers actually want. So I think that’s really important. And I think if we can do that we’ll start to see pensions becoming something that is back in fashion and people actively engage in and saving more money, which can only be a good thing for all of us.
MARTIN LYONS: Similarly I think a platform for development. Some stability in the pensions arena. We’ve obviously got the green paper, and there was a statement in there saying that there’d been no changes to pensions tax for a decade. I think there’s been one or two other changes in that period of time. So yeah, I think some stability. The correct placement as I was talking earlier around insurance and investment maybe, spending as little on that insurance as possible by using the best rates to allow more investment if that’s what’s required. But a sensible approach, and financial education for those individuals that are entering retirement.
PRESENTER: Very quickly, do you want them to tweak the tax system round pensions or do you think they should just leave well alone?
MARTIN LYONS: Oh my goodness. Well again as we said, it’s an open consultation and it would have to.
PRESENTER: Give us an answer, go on.
MARTIN LYONS: I think that tax relief at source is at the moment a very good idea. There is a cost, if we go down the TEE route clearly there’s a cost because most people are paying a higher rate of tax pre-retirement and therefore benefiting from tax relief more so than they’d perhaps benefit from having the benefits tax free later on. And so for a lot of individuals there is a price to pay for simplicity. So I think there needs to be a balance between simplicity but also maintaining a fair system. How’s that?
PRESENTER: Well last word from Steve Webb, it’s a very complex issue, but what would you like to see happen in pensions in the next five years?
STEVE WEBB: If I’d had another five years I’d have wanted to see the new state pension bedded in, become uncontroversial and widely understood. I’d want to see the remaining five million workers auto-enrolled. But then crucially the bit that’s missing is OK you’ve got five million people in, 10 million people in by then putting in 8%. We all know 8% is not enough for most people, and that’s the bit of the jigsaw that’s missing. We’ve got mass membership, which is fantastic, but people aren’t going to be putting enough in. So I’d like to see automatic escalation when you get a pay rise by default. A bit of that goes into your pension, that would be a big step but the right one. And then freedom and choice bedded in with the right advice and guidance. And then a stable tax relief regime, in my view some sort of flat rate up front relief would probably be the best mix. If we could do that then I’d die a happy man.
PRESENTER: And as somebody who’s been in pensions and in government, is in pensions, has been in government, say you got that and then someone said you could have another five years, would you be tempted to tinker or would you just be able to just take your hands off the tiller and just prod it occasionally?
STEVE WEBB: If you took the media away?
STEVE WEBB: Then you’d be OK. In other words there’s a, you know what they’re like, these media types. But that’s often where you know, why did the FCA do a review specifically on exit charges and transfer penalties and so on over this summer? Because those were the two things on the front pages of the papers. Not because they’re necessarily the two biggest issues. So that’s where the pressure comes.
PRESENTER: Higher contributions and ban the media.
STEVE WEBB: Yes, good liberal message to finish on isn’t it?
PRESENTER: All right, we have to leave it there. Gentlemen, thank you very much. Thank you for watching. Please do stay with us and you can see how you can use this programme as part of your CPD. From all of us here goodbye for now.
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