1. Tax planning opportunities in light of the changes
2. Future use of annuities and drawdown
3. The implications for defined benefit and defined contribution pension schemes
Tutors on the panel are:
Vince Smith-Hughes, head of business development, Prudential
Steve Martell, director development intermediary sales, Just Retirement
PRESENTER: In order to consider the viewing of this video as structured CPD you must complete the reflective statement to demonstrate what you’ve learned and its relevance to you.
The 2014 Budget has introduced some of the most radical changes to pensions in generations. What are the implications for advisers and for advice? Well to discuss that in this Akademia workshop I’m joined by three experts. They are Steve Martell, Director, Development Intermediary Sales at Just Retirement; Roger Cooper, Head of Trustee Services at Pi Consulting; and Vince Smith-Hughes, Head of Business Development at the Prudential.
Well let’s start by establishing exactly what did change with the Budget. Steve Martell, the Chancellor sits down on the 27th of March what had changed?
STEVE MARTELL: Well the short answer to that question is quite a lot. What the Chancellor did was to manage to achieve something that no-one’s been able to do in a previous generation. Suddenly get people interested in pensions and I guess the first bit’s the warm-up act that we have some interim changes being introduced of course in relation to drawdown. We have the changes to flexible drawdown with the amount going down to £12,000 in terms of secured income and some changes to trivial pensions meaning that more people will be able to access their full pension pot before April next year partly on a tax free basis with the 25% lump sum facility and partly on a tax paid basis. So some really significant initial changes, but what followed after that in terms of what’s going to happen after April next year is of course much more significant.
PRESENTER: Okay, well let’s bring Vince in here at that point, so those are the changes today, what are the changes as of April 2015?
VINCE SMITH-HUGHES: Well clearly the big change is going to be that people are going to be able to extract their whole pension pot out, so the amount over their tax-free cash sum is going to be subject to a marginal rate of tax, but people can take it as a lump sum if they wish to, which clearly is a big game changer in the retirement market I think. Now there are some other ancillary changes that we don’t know what’s going to happen yet. For example they’re talking about the 55% tax charge on death in drawdown. That may be reduced, we don’t know that, but as I said I think it’s a game changer for the retirement market.
PRESENTER: Well that’s a lot around if you like DC pensions there and personal pensions, what happens in the DB market?
ROGER COOPER: Well I think within the DB market there are a number of questions and a number of unknowns. I think the first unknown is to what extent will any DC element of DB be infected by these changes. So are AVCs captured by these proposals, that’s uncertain. It’s not clear from what’s been out there in the market to understand. The other immediate area was around the changes in trivial commutation, de minimis commutation. They may appear to be immediate options for DB plans, but the key issue there is do DB rules permit that? So that’s an issue. The other big issues around whether transfers from DB to DC will be permitted, and I’m talking about the private sector there, if they are permitted that will be a big game changer for DB plans as well.
PRESENTER: Because this means the money could just come straight out of DB and into this sort of new environment with…
ROGER COOPER: Exactly and that may be at or close to retirement. It will have a major impact on cash flows for DB plans and investment strategy and derisking strategies. So that big question mark about whether DB transfers to DC will be permitted is one that needs to be answered soon and no doubt will be.
PRESENTER: Vince, what does it mean for public sector schemes?
VINCE SMITH-HUGHES: Well I think public sector schemes almost certainly will people be stopped from transferring out of them, and for the simple reason it will be a big cost to the Exchequer if people start transferring out particularly unfunded schemes. I guess there’s a real point here though for advisers, which is that if there is potentially this risk of not being able to transfer out it might be worth reviewing those people who are in DB schemes, who have existing benefits, and see if it’s worth transferring out to a DC scheme now.
Now typically that’s probably only going to be of advantage to a very small number of people. We all know that DB schemes are probably a very good place to be and these rules haven’t changed that. But there are one or two occasions when it might be worth transferring out of a DB scheme or at least considering it and I would suggest that that’s a good time or now is a good time to review that decision.
PRESENTER: Okay, and Steve a certain number of uncertainties as well out there with this Budget, is there any timescale for when those uncertainties are going to be removed?
STEVE MARTELL: Well we have the consultation period which we’re going through now which finishes on the 11th of June, but there isn’t much in the consultation around any likely changes to these proposals. It’s more about how they’ll be actually delivered. So I think after that we would expect to see a little bit more final detail. But we’re still a long way of course from April and much can change between now and then. It’s interesting to see that there have been some comments in the financial press this week about the difference in perception about FCA thinking. Some people have suggested the FCA weren’t consulted, others have suggested that they have been consulted. I’m not sure what the reality is on that. We haven’t really heard anything from the FCA as to what their view is. Certainly all providers that are active in this market are now responding to the consultation, making comment that they think is relevant to ensure that those views are delivered across. And certainly the views of Just Retirement in that regard are quite clear.
I mean our views are that these new rules do give a massive amount of freedom to people and that freedom should be welcomed. There is kind of a however, because it’s dangerous here to end up throwing the baby out with the bathwater. And what do I mean by that? Well what I mean is that of course annuities as they stand today have fulfilled a role for people in two different kinds of ways. There is really a two tier annuity market at present and I think it’s important to distinguish between those two tiers of market. What the Government has sought to do is to remove that problem straightaway and to accelerate change. The FCA thematic review sought to actually address that issue and was ongoing, what the Government’s done is accelerated that and said well in the future basically if you’re going to be buying an annuity make sure it’s a good one. That has to be a really good thing.
So from our perspective I think the key points that we’re looking to get across are twofold. One, how do you ensure that if you’re going to buy an annuity you get the best possible value, and two, how do you ensure that that person gets guidance to help them with that decision-making process.
PRESENTER: Well I’d like to come on to sort of the long-term future of the annuity market in a moment if I may, but just bring it back to where we are, the changes are happening at the moment. If someone’s coming up to retirement now what should they do given these big changes at the horizon and these big unknowns as well, I mean from a personal pensions point of view, Vince, what’s…?
VINCE SMITH-HUGHES: I think it very much depends on the individual circumstances. So if you’ve got people who are able maybe to defer taking their benefits, that clearly is an option for people, and they might want to wait until they do anything until the new rules come into play, because as we’ve already said it’s not completely clear what the new rule’s going to be. Nothing’s definite, this is a consultation. For people who need tax-free cash and their income, and possibly want to take advantage of some of the new rules, then of course they could do worse and do that and go into drawdown for the time being, pending sort of like what the final decision and what the new rules are going to be.
PRESENTER: Okay, and Steve, sorry you want to come in?
STEVE MARTELL: Yes, I mean I think there are three things I should do, and it reminds me of the Green Cross Code this actually, for those of us old enough to remember that. Stop, don’t take any real kneejerk decisions, think about what your options now; look, look at all those options, consider them really really carefully; and thirdly listen, listen to some guidance, get some guidance. Because with freedom comes responsibility, and you have that responsibility for the rest of your life. If you get it wrong at outset then probably you’re going to have to live with the consequences. So I’d say the three things stop, look and listen.
PRESENTER: And from a trustee’s point of view, Roger, what should you be doing as a trustee? What do you communicate to members at a time like this?
ROGER COOPER: That’s a good question. In terms of a trustee of a DC scheme I think that the immediate issue is about what will members need to help them understand these changes, that we’ve already had questions from members and they’re around understanding what it means for me now, but the key questions come from people who are on the cusp of retirement, they may be in the process of buying an annuity, and so I think as a trustee there’s an obligation to make that member aware of an additional option they may have, that there are changes being proposed, which they may or may not be able to or want to benefit from in the future. They may want to defer taking a decision about buying an annuity now.
STEVE MARTELL: And I think that trust based DC schemes are a really good example of extra decisions that perhaps need to be made, because many people in trust based DC schemes in the past haven’t necessarily looked at all of their options. In many cases they’ve just defaulted into buying an annuity with a holding scheme provider. Now, not only do they need to look much further beyond that and look properly at the open market, look at trying to qualify for enhanced rates etc. of annuities, but look at all of these options. As Roger’s saying, because consideration of all these options for all clients now becomes critical, which brings us back to the guidance point and how is that guidance going to be delivered, and I’m sure that’s a point that we want to touch on here.
PRESENTER: Yes, well I was going to say on that, Roger, the Chancellor said everyone will get lots of advice, then that became guidance, what is it now?
ROGER COOPER: Well I think it will be guidance, I can’t see that it will be advice, free face-to-face guidance. My concern is that that will be quite a vanilla outcome. It won’t be any more than just clarification of what members’ options are. Members will still need support as to what is the right option for them to take. Where they’ll get that guidance who knows? Because it does depend on really how much the sponsor, the employer or the trustees facilitate that guidance, and to some extent how much money the member has in their pot to be able to obtain guidance themselves from an IFA, so I think that’s where they will ultimately have to go. My concern as a trustee and so on in the pensions industry is that this could be an opportunity for the sort of predators we’ve seen around pensions liberation to step in and be the friendly guider for that individual who needs help. I think that is a worry.
PRESENTER: Well it’s interesting. I mean to what extent the Chancellor could he be seen as the biggest pensions liberator of all and not in a good way.
ROGER COOPER: There has been that comment, yes, just sort of like legalising drugs to stop the predators coming in, but no, I mean there’s been a lot of debate about that. There’s absolutely nothing wrong in liberating members’ pensions, liberation is a positive thing. Where it’s abused that’s where it’s wrong, when there’s fraud attached to it that’s where it’s wrong, and a member, an individual’s ability to take their funds in the way that works for them, provided they’ve got advice to help them decide what is best for them, I’m not sure that there’s much wrong with that. The reality is that that sort of informed guidance isn’t always there.
PRESENTER: And Vince, what advice opportunities does this throw up for financial advisers?
VINCE SMITH-HUGHES: Well I actually it’s probably the best thing that’s happened to the financial advice industry in a long time, because it does create so many advice opportunities. You’ve got people who will still want to buy a sustainable level of income; you’ve got people who will want to cash their pension pot in; you’ve got people who will just want to sit in what looks like drawdown today and take income and part of their fund out gradually sort of like under the tax bracket as it suits them.
So I think there’s a whole host of different advice issues. But if you boiled it down even to its simplest form, let’s say you’ve got someone who maybe has got a pot of let’s say £30,000, they’re retiring, they’re earning about £40,000, a very simple bit of advice from an adviser might be well actually don’t cash your pension pot in this year, wait until the next tax year when you’ve retired, because otherwise you’ll be paying 40% tax and everything over and above your tax-free cash sum. So huge advice opportunities for advisers and most of the ones I’ve spoken to are very excited about it.
PRESENTER: And it’s a good point actually is that one thing you want to do is if you draw lots of your pension down you might find yourself as a higher rate taxpayer.
VINCE SMITH-HUGHES: That’s right and sort of certainly the advisers who’ve been already advising on flexible drawdown many of them have said to me well, there was an assumption at the outset that people just take all of their fund. My sense is that’s not really happening, because what I think people are doing is taking it out gradually and trying to avoid paying a large amount of tax in one go, and obviously by doing that they’re then creating an income stream as well. So again I think it’s a great opportunity for advisers.
PRESENTER: What’s the role of annuities for the future?
STEVE MARTELL: Yes, I think the role of annuities will continue to be a core role of retirement income planning, because if you start with the point that people now have more choice they need to have a benchmark from which they’re going to make their decisions. And that benchmark perhaps always has been in the past an annuity and perhaps always should be in the future an annuity. The problem is for many people it’s been the wrong benchmark, they’ve been looking at the wrong annuity rate.
So if they’ve been in an existing scheme, a money purchase arrangement, an occupational DC scheme, whatever it is, they’ve probably started with the benchmark of the holding provider rate. And clearly there’s a big gap between the holding provider rate in many cases and what the open market option rate might look like. And then there’s a further gap between the open market option rate and the typical enhanced rate if they’re one of the majority of people that qualify for one of those improved rates.
So the benchmark to start with for everyone we feel has to be the minimum standard being look for the open market option rate. If we could wave a magic wand and get everyone from the point of existing provider rate to benchmark best open market rate as step one, layer on step two as being ensuring that if they do qualify for an enhanced rate that they identify that going through a simple process, and then step three then becomes use that benchmark as the basis from which to make your decision as to whether you should buy an annuity or not.
PRESENTER: But Steve if I’ve say got an ill-health do I go for an enhanced annuity or do I just take the money and run?
STEVE MARTELL: Yes, that’s a very good point and most of the majority of people that buy enhanced annuities have a marginal degree of reduced life expectancy. So for example rather than being expected to live for say 23 years they’ll end up being expected to live for 19 years. So all you’re doing really is shortening their life expectancy. Now the value of annuity to them over that 19 years is of course every bit as great as someone’s that’s expected to live for 23 years. If they go on to live for 23 years or 25 years or 26 years the value becomes absolutely exceptional.
So doesn’t really matter how long they live if they’re buying an enhanced annuity what is different is perhaps in the impaired market. In the impaired market where people have very much reduced life expectancy I think that market will probably take its own view as to whether it is now suitable to purchase an annuity or whether it might be better to hold that money in a different way.
PRESENTER: And Vince, I mean as the Pru I mean you’re an annuity provider as well, what do you see as the future for annuities under the new rules?
VINCE SMITH-HUGHES: I think annuity’s got a good future. I mean I think, you know, several things really that you can look at and why people are still going to use annuities, there are a lot of people who will want certainty over their income, and annuity is still going to give them certainty. So I think that a lot of people are still going to annuitise in that regard. I think also though you’ve got people who with larger funds will perhaps say well I’ll actually buy an annuity, but only for part of my fund, so I’ll get some certainty of income with part of my fund, and for the rest of it I can take it as income or tax-free cash as and when it suits me.
So I think there’s a good couple of years for annuities and I guess the other thing with annuities we shouldn’t forget is at the moment as we sit here today we’re in a very low interest rate environment. If interest rates increase perhaps the next four, five years maybe we’ll start to see annuity rates going up again. So it’s just as we’re looking at it here today people might say well annuity rates are relatively low, that might not be the case in four or five years, but yet I still certainly think there are a lot of people who will buy annuities.
PRESENTER: Roger, what’s your sort of feeling on how people coming out of corporate pension schemes are going to try and structure their retirement income?
ROGER COOPER: Well I think how they will be able to structure their retirement income is the key issue, because I think up until now, and at the risk of offending Vince, I think the insurance companies had quite a cosy environment really, because they’ve known that when members’ accumulated funds are going to be utilised, apart from the tax-free cash sum that’s paid out, one or other of the insurance companies will have an annuity secured with them, generally. I think insurance companies are going to have to look to find new products, more exciting products that can help meet members’ needs.
Because members’ needs are different depending on their state of health, but also in terms of their lifestyle and looking at say long-term care. I think this could be a really exciting opportunity for the providers to look at products that do provide that basic underlying annuity. It might be a fixed term annuity, it might be an annuity that starts at a later date, it might be something that can be flexed to cover the risks of high long-term care costs later in life. A sort of flexible product that meets those needs will be helpful. Key will be that the member understands what they’re buying.
PRESENTER: And particularly in the DB space and I can see DB have lots of liabilities a lot of schemes might be thinking this is a fabulous opportunity to offer people some cash up front and just get them off the books. What should you do if someone makes you an offer like that?
ROGER COOPER: What as a member or as a trustee?
PRESENTER: Both cases.
ROGER COOPER: Yes, well if the trustee’s faced with the employer saying we want to do say an enhanced transfer exercise now because we want to get in during the window of opportunity we have, where DB to DC is a certainty, we can still do that. I think as a trustee I would always want to be as cautious as I am always with regard to dealing with ETV exercise. Nothing wrong in doing that, it’s a good part of derisking, but I want to go through that process. The risk is trying to get in before the window closes, could be that it’s rushed and doesn’t work effectively. It could be that members are transferring and find that legislative change, retrospective change could impact the options they may have thought they would have. So I think it’s always caution in terms of how you respond to this situation. The key thing for the member is that they get clear honest advice and information.
PRESENTER: And Steve, the FCA’s been very keen on things like capacity for loss, so where does that fit? If you’ve got the Regulator’s been very keen on that, where does that fit vis-à-vis annuity?
STEVE MARTELL: I think it’s a really really really important point Mark, because capacity for loss has been central to the whole FCA approach to suitability for going into drawdown. So if you look at the type of client that the FCA view as being suitable for drawdown then they have to have capacity for loss, which means they have to be able to tolerate investment performance risk and they have to accept that there’s maybe quite a lot of uncertainty.
So when you have a new environment now where everyone with £10,000 in their pension fund, or whatever they’ve got in their pension fund, could put themselves into a totally form of flexible drawdown and remove any of the money at any point, the capacity for loss in that situation has to be questioned. Because does that individual have the capacity for loss in the future? Does it mean then that the FCA have a view about what capacity for loss should look like? Does it mean that they’ll be looking at the conduct of business rules for the suitability of people going into drawdown? Because there does seem to be a slight disconnect between the existing FCA rules and the new proposals.
PRESENTER: Well the FCA might look at it and say well if you had £10,000 your annuity was going to be so slight it doesn’t actually matter, there’s a cut-off below a certain level where it makes…
STEVE MARTELL: Yes and hence the triviality rules that they’ve introduced. I mean clearly in many cases that money may be extracted if people have got debts to repay, credit card debts, mortgages for example, then from a financial planning perspective they may use that capital to repay those debts, and that is one possible use of the money. But if you think about the more widespread drawdown market, typically you’d be thinking perhaps of anything from £100,000 and upwards, not necessarily £100,000, but let’s put that on as a figure for the moment. Many people go into drawdown quite correctly for all the correct financial planning reasons and many of those will probably end up doing what they do today, although they may do a little bit more tax planning to extract some of the funds in a slightly different fashion, but their behaviour’s probably going to be very similar. But those people that wouldn’t have gone into drawdown, because they just don’t want the fact that risk looks different when you take an income and they don’t have to live with the consequences of those types of decisions, now may be tempted to do so.
So you could have an individual with let’s say a couple of hundred thousand that previously in the past might’ve chosen not to go into drawdown, but now is encouraged to go into drawdown because of the increased flexibility. But it doesn’t mean it’s any more of a suitable solution for that individual, because what do they do with the money? And having then made that decision if they extract it too quickly they face a tax charge that’s well above what they would have expected, if they don’t do something to generate a future ongoing income in a way they’re comfortable with they’re not meeting their investment objectives. So clearly there is a great risk there with the typical client that may be encouraged or thinking about taking on more flexibility.
PRESENTER: And Vince, what’s your take on the future of the drawdown markets? You said traditionally it’s been a product where probably £100,000 to £200,000 lump sum you’d consider it.
VINCE SMITH-HUGHES: Well I think actually personally I slightly disagree there actually, because I’ve always thought that sort of drawdown needs to fit in with someone’s overall sort of financial position. And I remember having a conversation with an adviser a couple of years ago and they were basically saying that the FSA at the time had questioned them as to why they’d done a drawdown case for only about £40,000, but actually they managed about £7m in assets for this particular client, so actually it was a very very small part of their overall portfolio. So I think drawdown yes it’s definitely going to work, it’s got to be looked at in the view of their overall context of their financial circumstances.
I think what a lot of people do and certainly we’re already having these conversations with advisers is to use drawdown, but try and use drawdown in a way that actually gives people a sustainable level of income. So they’re in drawdown, but they’re not stripping it all out in one go, they’re actually saying well I’ve got a pot of X, it might need to last 25 years, I’ll actually take it out on a sensible basis and try and create a sensible stream of income. I don’t think you can get away from the fact that obviously a lot of the people with the smaller funds will probably sort of extract cash over a much shorter period of time. But with people with larger funds I think they can do some really good tax planning and income planning in the future.
PRESENTER: Okay, Steve, you want to come in there.
STEVE MARTELL: And I think that what Vince is suggesting here, quite agree Vince that it almost crystallises into three different parts of the market. Those with smaller pots, however you define those, maybe up to £30,000 will most naturally look more closely at extracting the cash. Those with medium sized pots with medium net worth depending on how much they have in other assets we’ll think about these other options, perhaps anything from £30-40,000 up to whatever level that people would need for assets to justify drawdown, will then have much wider choice, and it’s in that area where they’re going to need help, and those that would go into drawdown, at whatever level of assets that is, or whatever’s appropriate in line with the rest of their financial planning strategy, will continue to do so. And I don’t think actually their strategy’s going to be very different. It’s this middle ground of maybe whatever that number is £30,000 to £150,000, £100,000, £200,000 whatever it is for those people, they’re the ones that need the guidance and the help to make them right.
PRESENTER: That’s where your margin for error is that much smaller.
STEVE MARTELL: It is, and there are a lot of those people. Whilst there are a lot of pots that are smaller pots, then certainly the type of customer that we sit fits into that middle ground of middle Britain that has to make the right decisions for them for the longer term. They’ve got a pension pot that’s of some significance to them. They take the tax-free cash; they have financial needs for that. What do they do after that? Because in some cases that can create tax-free income for them in the new tax allowances. If they’ve got basic state pension and they can take a fixed income stream from an annuity of three grand a year they’re probably going to get just about all of that tax-free. So there are so many implications for them and my key concern is ensuring that perhaps they understand those issues, and that’s where advice is so important and advisers have such a key role to play in terms of being really proactive in that middle space.
PRESENTER: Okay, Vince, I see you wanted to come back in on something said there.
VINCE SMITH-HUGHES: Yes, I was just going to make the point Mark that clearly there’s going to be a lot of people going into drawdown, take income out as we said earlier, but I also think you can’t ignore the fact that’s not a one-off decision. As Steve said like people are going to be getting advice on these things and actually I can see that when people get into their 70s they might start to look at annuitisation again as actually quite an attractive option for them. Maybe they don’t want the hassle of looking at their drawdown portfolio, maybe they want to simplify their income stream, so it might be they have a sustainable income model sort of going into sort of like their 60s and starting in their 70s and start to annuitise perhaps gradually during the course of their 70s.
PRESENTER: If you could put, I mean roughly speaking, a number, what’s the difference if you put £100,000 into annuity and you retire at 60 versus if you did the same thing at 70, just to get an idea of the income difference?
VINCE SMITH-HUGHES: Well it very much depends on someone’s own personal circumstances, so it’s actually sort of quite difficult to give an answer to that. But if you were sort of saying well actually it’s probably somewhere in the region of sort of like between 10 and 25% that might give you sort of like a bit of a feel.
PRESENTER: And that’s an open market one okay.
STEVE MARTELL: The point that Vince is raising here about the way people will change to annuitise, it’s already begun to happen in the marketplace anyway, because those in drawdown often talk about the decade of annuitisation in that maybe there’s a period that you get to in your life where it’s probably in your 70s where you start thinking about to what extent do I want to now partly annuitise with parts of my fund? It’s certainly an argument if you’re qualifying for an enhanced annuity to look at that process throughout that decade. There comes a point for example when if you leave it too late the probability of getting much of an enhancement goes down, because you’ve had most of your life expectancy already.
So looking at that, building it into the planning is very important. In fact we’ve done some work recently to look at the effect of using enhanced annuities in relation to critical yields and what the drawdown review process looks like. And it’s very interesting to see that the typical review process for advisers around drawdown doesn’t necessarily factor in what the individual personal annuity rate would be for a client. And perhaps again that should be the benchmark. Kind of as Vince is suggesting here that if someone could qualify for an enhanced annuity rate of say 8% compared with a level annuity rate on a non-enhanced basis of 7% it might change their decision-making and the pace at which they may seek to exit a drawdown arrangement and how they choose to do it.
PRESENTER: Well I think this leads to a point Roger you alluded to earlier which is what is the date we’re all saving towards now? From the old days we were all saving towards retirement what is the end date?
ROGER COOPER: Yes, well the end date is…
VINCE SMITH-HUGHES: The end date.
ROGER COOPER: The end date, probably there will be various points at which an individual will want to withdraw funds, use their retirement savings and actually the word savings is less now about pensions, it’s about savings. And picking up Vince’s point occupational scheme benefits are now very much in the wider savings environment. I think the challenge is going to be finding a suitable vehicle for that middle ground of person that Steve was talking about who is looking for drawdown, where do those funds get placed to give the investment return that’s appropriate for them that matches their investment risk, gives them the flexibility and all of that being done at a cost to them that is appropriate.
And I think from the point of view there are a few DC trustees sitting around thinking I’m not really that keen that I through our scheme will be providing drawdown. Up until now it’s been possible to discharge the obligation at the point, the one point the member retires by paying out the cash sum and buying an annuity. If that member’s looking for drawdown I don’t think the occupational scheme’s going to want to provide that facility, because it’s not geared up to do it, so again a fantastic opportunity for the insurance market and other investment markets to come in and offer products that really meet those needs but for the individual.
PRESENTER: So do you think that these changes are introduced, what they might mean is actually the responsibility of trustees towards individual members of pensions potentially stretch out further than they would have done under previous…
ROGER COOPER: Well I’ve turned it round the other way, I think the trustees of pension funds need to think about their responsibilities to members, particularly DC schemes at an earlier point so that the member’s getting support right the way through their membership of that scheme, as they’re building up their pot of money for the date or number of dates that they will actually draw their benefits. Helping them get to a point where at and as they approach retirement they’re investing the right range of funds to meet those specific needs, and there is a facility to help them transition from working life to retirement, I think the trustees need to be able to ensure that there is a facility that meets those needs for the member. Whether the trustees are then providing the vehicle to deliver drawdown or whatever’s needed, I doubt that that will be the case, but we’ll have to wait and see.
PRESENTER: Vince, I mean I suppose implicit in this is the idea that possibly rather a large of accumulation vehicles that sit behind whatever type of pension you take might need to be at the very least recalibrated, is that something that you as the Pru are looking at working on?
VINCE SMITH-HUGHES: Well I think we’ve got to look at everything under the new world and look at different possibilities. And I think Roger made a really good point actually, he used the word transition, and I don’t think retirement for a lot of people anyway is something that just happens on one day now. Actually people will transition into retirement by gradually working less and less days per work and sort of ease their way into retirement, and I think there is a real need and I think these new rules actually give us more ability to do it, to actually design products and help people to actually subsidise their income while they are in that process of transitioning into retirement.
PRESENTER: Okay, Steve, are you confident that given these changes of rules and from what Vince has said that it’s been a process, it’s not a date, but are you confident that we’ve got the right accumulation and decumulation vehicles for people?
STEVE MARTELL: I think we need further innovation. I think what this is going to trigger is a loss of innovation, and there’s certainly been some comments in the Press recently from Just Retirement about our belief that the rules around the way in which you can buy an annuity needs to become more flexible for example. So that the delivery of a certain income and that type of product needs to have more flex around it, so that people do have more access and more choice, if they want that style of product that they can buy it in a subtly different way. Because clearly in the future talking about transitioning, both the points that Roger has made around transitioning is so much the norm now, we’ve seen people begin to consider things like fixed term annuities for that very reason.
The increased appeal from fixed term annuities in the marketplace has come very much because of the fact that people just don’t suddenly give up work on a Friday, pick up the carriage clock and start playing golf for the rest of their retirement, doesn’t happen. You probably see them on the till in Sainsbury’s the following week if they want to do something just to earn some money, or they will go into it gradually. So that innovation has begun to happen, what I think will happen now is it will be accelerated, because there is a need for a more varied set of solutions. But because of that we probably need some rule changes to allow these new products to be designed. The existing rules for example around annuities don’t allow the type of product that I’ve just described with that flexibility currently.
PRESENTER: And what issues does this throw up, I’ll come to you first with this one if I may Vince, but in terms of advisers and just the training, I mean if this world is changing does this open an opportunity for something like, I don’t know, The Society of Later Life Advisers? How do you get your head around all of this and demonstrate it?
VINCE SMITH-HUGHES: Well one of the first things we did, we have a sort of fairly continual seminar programme anyway, but we immediately change sort of like the subject to look at the Budget, what’s changed, what’s likely to change and all of the advice implications of it, so I think there is an awful lot for advisers to understand. And I guess that’s going to be a gradual process over the next year, because as we’ve said earlier a lot of these rules aren’t guaranteed and set in stone, so to a certain extent a lot of advisers are going to be giving advice to people, but not actually knowing what the rules are going to be enforced in a year’s time. So obviously that’s tricky, but certainly I think there’s a big training requirement, a lot of understanding that advisers are going to need to take on board, but they’re very well placed to do so I would say.
PRESENTER: And Roger, what does it throw up in terms of training needs for trustees?
ROGER COOPER: Well I think the Regulator’s Code of Practice has clearly identified that there are elements of DC that require some attention from trustees and that some self-reflection in terms of their understanding of the responsibilities they have if they’re looking after a DC bunch of assets as opposed to DB, because it’s a very different world. And typically if you’ve got a hybrid scheme with DB and DC, the DB pieces had the centre of attention in recent times probably at the expense of the DC. So I think it’s important that trustees understand their responsibilities, key area is around the investment vehicles that have been offered as the options to members, and the suitability of those particularly lifestyle vehicles, because they’re designed to provide an annuity at the end. They’re not designed to allow the member the flexibility to go on into retirement and take drawdown.
So I think there’s a need to change the offering there and that trustees understand what they need to do in that area. And particularly around member education, so it’s trustee education first, but I think the member education piece is even more important now, because generally the level of understanding around the pension element of saving the threshold of its knowledge is pretty low and it needs to be raised massively. Realistically it’s going to take a long long time and not necessarily be something that can be achieved to the degree it needs to be, but you’ve got to make a start basically.
PRESENTER: Okay and Steve?
STEVE MARTELL: Yes, I’d like to put a question to Roger if I may, because I think there’s something that he’s raised is terribly important here Roger in relation to member education etc. of schemes. How do you overcome that inertia of scheme members to want to engage with this and find it’s something that’s important?
ROGER COOPER: Yes, well a short answer is I think that’s the biggest challenge that you have, that a trustee has, that generally society has to actually get people to understand the importance of having to take responsibility for their own saving, their own futures, I think that’s the key piece. I think it’s about constant drip-feed of interesting and relevant information. I think the one thing that the change that has been announced in the Budget will do is allow something that has been really quite mythical and not intangible and not actually fully appreciated be much more apparent, because if these changes come forward in the way they’re proposed it will be much more something that’s flexible, easy to access and therefore of interest to members. They will be able to value them better. And I think if they can value what they’re getting and they can understand the merits of it they might actually start to have an interest in acting responsibly in the way they manage it.
PRESENTER: We are I’m afraid pretty much out of time, so I’d like to get a final thought from you all, the Government said that it is consulting on its changes. Steve, one thing you’d like to lobby the Government on just to help redirect its path of travel.
STEVE MARTELL: Creating that benchmark, ensuring that everyone that considers an annuity considers the annuity rates, the best possible annuity rate for them, making sure that the benchmark is the open market rate and that if they do qualify for enhanced rate that they find it and use that as the start point, that for me is the most important thing.
PRESENTER: Okay, Roger?
ROGER COOPER: For me the key thing is that private sector schemes will be able to continue to make transfers from DB plans to DC. I think that will be a really positive opportunity and I don’t think members should be prejudiced because they’re in a DB plan from having the flexibility that’s available to them if they’re in a DC scheme.
PRESENTER: Okay, Vince Smith-Hughes.
VINCE SMITH-HUGHES: I think for me a smooth transition from old world to new world and there are two parts to that really, so not just in sort of like the technicalities, but to make sure that we’ve got as much notice as possible of what the confirmed changes are going to be, so the industry’s got time to prepare, but also just to clarify what it means for advice and what it means for guidance and again to give the industry clear guidelines on those points.
PRESENTER: Have to leave it there. Vince Smith-Hughes, Roger Cooper, Steve Martell, thank you all very much indeed and thank you for watching.
There’s some information coming up in a moment on how you can use this as part of your structured learning via the Akademia site, but just before I go if you’d like to get a CPD certificate on this from the Prudential you can do that too, if you go to the Pru’s test centre and log on at Pruadviser.co.uk you’ll be able to register there too. Thanks for watching. Goodbye for now.
In order to consider the viewing of this video as structured CPD you must complete the reflective statement to demonstrate what you’ve learned and its relevance to you. Among the topics covered by this workshop on the 2014 Budget are tax planning opportunities in light of the changes, the future of annuities and drawdown and the implications for defined benefit and defined contribution pension schemes. Please now complete the reflective statement to validate your CPD.