As I reached the end of the FCA’s Retirement Outcomes Review interim report, I could not help but feel there was an elephant in the corner of the room, quietly waiting to be addressed.
The report focuses heavily on what consumers have been doing and its suggested remedies are based on these actions. What the remedies do not address, however, are the reasons why consumers have made these choices.
Reading the report and the annexed research papers, you could argue consumers’ actions since pension freedom are not quite as concerning as the remedies would seem to suggest.
The research found, for example, that very few consumers used information available from their providers or used services such as Pension Wise before accessing their pensions. It also, however, found that many of these consumers have only taken their tax-free cash entitlement and are still working.
The research paper explains these respondents felt they were ‘simply making a decision to withdraw some money’ and therefore did not want help at this stage. They also, however, acknowledged that when they stop work and need to arrange retirement income, they will need to seek guidance or regulated advice. This suggests a more responsible attitude than the FCA seems to recognise.
The research also found an individual’s accessed pension was normally relatively small and very rarely their main source of retirement income. Only 3% of consumers who fully withdrew a pension stated it was their main source of income, with the average respondent having four other sources of income for their retirement. Again, this does not paint an overwhelmingly worrying picture of consumers’ actions.
This general profile of the first wave of consumers to use pension freedom – relatively financially literate with other sources of income – was also found in earlier research by the Pensions and Lifetime Savings Association (PLSA). The PLSA research went further, however, and concluded this group of consumers is unlikely to be representative of later groups to use the pension freedoms.
Many of these ‘first wave’ consumers are either exhausting small pensions in the knowledge they have other significant sources of retirement income, or are choosing to take tax-free cash early without changing their plans for the remaining pension fund. They might not be considering all of their options or making the optimal choice for their circumstances but the research so far does not seem to suggest an impending crisis.
Then there is the finding that most consumers who have taken money from their pension have not spent it. It may initially seem positive news that most individuals are not simply withdrawing their pension money and spending it without blinking. This is where I think the main problem starts to appear, however, and why I think the remedies are ignoring the most important element of the research.
After all, if individuals are not spending the money, then why are they withdrawing it? You do not have to go far for the answer – it is mentioned throughout the report and research papers … consumers don’t trust pensions.
The research respondents had not generally had bad experiences personally – their mistrust was created by perceptions of the industry. The FCA paper state respondents “referenced the constant stream of ‘bad news’ pension stories in the press and historic ‘pension scams’” and “could not distinguish between stories related to defined benefit and defined contributions schemes and they were not able to say why these issues had come about”. Respondents also talked about wider financial services issues, such as endowment policies and the financial crisis.
It would be reasonable to point out the research focuses on unadvised consumers and individuals who seek advice generally do see the value of pensions and financial services. I still think, however, the research findings are worrying for the industry as a whole. The view there is no such thing as bad publicity does not seem to ring true here.
To be fair, the report does acknowledge this issue and the fact that mistrust will be difficult to address – and yet the remedies then seem to fail to even attempt to solve this problem.
The FCA’s conclusions and suggested remedies put a heavy emphasis on providing information more effectively in order to allow consumers to make better decisions. It is certainly true the research uncovered a number of misconceptions – for example, many consumers did not realise they could have accessed their tax-free cash from age 55 even before pension freedom.
Yet all the education in the world will not change the mind of a person who does not trust pensions. This is the real issue we need to address.
Jessica List is pension technical manager at Suffolk Life