John Lawson: The next step of the retirement outcomes review

John Lawson explains why we need simpler journeys for customers after re-examining the FCA’s retirement outcomes review, which will set out remedies in January 2019

The keenly-awaited retirement outcomes review paper was published in June, after much speculation over what it would contain.

Now the dust has settled it’s clear that, in general, the paper contains a lot of sensible suggestions, which the regulator is consulting on with remedies and a policy paper expected in January 2019.

For example, that communications about retirement options should start earlier than they currently do. Pension savers need to properly understand their choices and the implications of those choices, such as the risk of running out of money or paying excessive tax, before they can get their hands on the cash.

Telling customers what their options are six months before an arbitrary ‘selected’ pension age is too late. Many make the decision to withdraw their money long before they even receive their wake-up pack, which we should re-name these ‘retirement options packs’, which better describes their purpose. Regular retirement options communication should start no later than age 45, to give savers plenty of time to think about their choices before they have spent the money in their heads.

This would also allow savers to appreciate the benefits of contributing to a plan for longer and consolidating their pensions in advance of retirement. They might also be more sensible about what they do with a bigger pot than a series of smaller ones.

Starting communication earlier can also help customers plan appropriately; encouraging customers to consider a mid-life MOT to review their plans or highlighting the benefits of taking independent advice.

All communications need to be simplified, including key features illustrations (KFI), which go over most people’s heads and are typically full of numbers, calculated to a spurious degree of accuracy that would make Albert Einstein frown.

The trouble is, the numbers represent just an estimate, and can be guaranteed to be 100% wrong once we have the benefit of hindsight.

Sadly, some customers take these projections as read (no wonder, given they are ‘accurate’ to the nearest hundred quid) and assume that is what they will get back.

It’s high time we moved away from deterministic projections towards stochastic projections. Markets don’t go up or down in straight lines over 30 years.

Deterministic projections don’t illustrate the widely varying outcomes that might be experienced in future. People need to know that the future is uncertain and that they should plan accordingly.

Surely the main aim of written communication is that the recipient actually reads it? Let’s take this opportunity to fundamentally re-design the KFI and make it fit for purpose.

Default pathways are also worthy of support but allowing a different process for those with a small amount of savings versus those with larger amounts would be helpful. It isn’t a case of ‘one size fits all’ for customers.

We drag unwilling participants with £5,000 of savings through lengthy conversations about annuities and flexi-access drawdown, neither of which are of any use or relevance to them.

For customers who only have a small amount of savings, we need a simpler journey that focuses on how they can extract their money over a reasonably short period in the most tax efficient manner.

These customers make up a surprisingly large proportion of people accessing their pension, so the benefit gained would be large.

We await the Financial Conduct Authority’s policy statement in January and hope that effective communications will be the cornerstone of their findings.

John Lawson is head of policy (retirement solutions) at Aviva