Let me be clear – no one will have to buy an annuity,” are the famous words quipped by the former Chancellor of the Exchequer George Osborne as he outlined his plans for pension freedoms in that famed 2014 Budget speech.
And, alongside that now-famous quote came several others deserving of note. These, however, are much less memorable. “Everyone who retires on these defined contribution (DC) pensions will be offered free, impartial, face-to-face advice,” Osborne declared. Could it be the then-chancellor meant guidance, rather than advice?
While all of those lines deserve examining, it is the last sentence this article will focus on. How did the government and the financial regulator consult on these “consequential implications” that would go on to see £60bn of people’s money leave final salary schemes in the first four years of pension freedoms?
Did the government or the Financial Conduct Authority (FCA) consider the repercussions of allowing thousands of individuals to leave their DB schemes? What is more, did either institution foresee that just less than half of transfers would be considered suitable by the regulator?
Alongside the 2014 Budget, the government released a consultation on pension freedoms, which included a section on DB transfers. The paper asked respondents whether the government should continue to allow private sector DB to DC transfers and, if so, in what circumstances. It also made clear it was concerned that large-scale transfers from DB schemes could have a detrimental impact on the wider economy. Nowhere in the consultation, however, were pension scams mentioned. Nor were any references made to potential conflicts of interest for financial advisers.
In July 2014, some four months after pension freedoms were announced, the government responded to its own consultation. In addition to rephrasing Osborne’s promise that everyone would receive “impartial guidance” instead of “advice”, it was in this paper the government introduced plans to force those wanting to transfer a DB pension worth more than £30,000 to take regulated financial advice.
Even at this early point the government said it would likely be in the best interests for the majority of individuals to stay in their DB schemes. That said, alongside the typical exceptions (unmarried, no dependents, debt and so on), the government suggested a DB transfer would be appropriate for those who preferred wealth to an income stream. Still, there appeared to be little consideration for how pension freedoms could have unintended consequences for the advice profession.
‘Helped Conservatives get re-elected’
The real reason George Osborne decided to introduce pension freedoms when he did remains unknown. The pension freedoms policy announcement came during the coalition government when the Conservatives were working with the Liberal Democrats, a little less than a year before the general election. The policy itself came into effect just months before David Cameron was re-elected as Prime Minister, this time with a majority in parliament.
It is conceivable Osborne introduced the freedoms to appeal to older votes at a time when the Conservatives did not have a majority in parliament. For Personal Finance Society chief executive Keith Richards, at least, that is the case.
He tells PA: “That policy is singled out as one of the core reasons that helped the Conservatives get re-elected. It was a massively popular policy decision by the chancellor and it wasn’t consulted on. In fact, it’s rumoured that no one really knew about it until literally the point at which it was announced. So it was a well-guarded secret.
“And there’s no question that the public responded very positively,” he continues. “And why shouldn’t they? It sounded like they were being treated like adults and empowered to make their own informed decisions. I’m pretty sure it’s a contributing factor that certainly helped with the election.”
On the other hand, Intelligent Pensions head of pathways Andrew Pennie is a bit kinder to Osborne, believing the move was less driven by policial motives. He says annuities – the product retirees were effectively “shoe-horned” into before freedoms came into effect – were getting a rough ride in the media. He believes the former chancellor wanted to release the public from an annuity-funded retirement.
“Annuity rate changes are closely linked to 15-year gilt yields and life expectancy,” Pennie explains. “Prior to pension freedoms, annuity rates were falling as interest rates continued to fall and life expectancy continued to rise. Annuity rates hit rock-bottom shortly after the EU referendum result [in 2016], plummeting to as little as 4.5% for a 65 year-old.”
Indeed, Pennie reckons Osborne was merely trying to get retirees a better deal: “Mr Osborne made it very clear he believed pension freedoms are in the consumer’s best interests and, despite the increased risks and complexity that come with pension freedoms, I would heartily agree with him.”
Early FCA policy
While the government appeared to organise itself for pension freedoms relatively quickly – albeit using broad brush strokes and with little apparent consideration of the further complications and risks for consumers and advisers – the FCA was slower off the mark.
Although pension freedom was announced a mere 13 months before the revolutionary policy was implemented, the pensions minister of the day Steve Webb believes the FCA had enough time to prepare.
He reasons: “Imagine George Osborne had said ‘in two years’ time, we’re going to do pension freedoms’. The annuity market would have been completely stalled for two years, and then there would be a massive wall of money itching to get out on the day after the rules changed. You’d have had vast capacity issues about guidance lines, providers and all the rest of it.”
In a November 2014 policy paper on the retirement reforms and guidance guarantee – just five months before the freedoms came into effect – the FCA did not make a single reference to DB transfers. It was not until a consultation paper on the proposed changes to pension transfer rules, dated March 2015, that the financial watchdog made a clear-cut reference to DB transfers.
Finally, in June 2015 – two months after pension freedoms had been introduced – the FCA came out with a response to its consultation. In the paper, it predicted around 35,000 individuals would require advice each year on DB to DC pension transfers and estimated it would take 7.5 hours to advise on a single transfer.
However, it may not surprise readers to hear the FCA was wide of the mark in its estimations. A number of advisers confirmed advising on DB transfers takes considerably longer than an estimated 7.5 hours and some even told PA it takes as many as 60.
Probing more of the FCA’s early estimations, recent figures found 234,951 people received DB transfer advice between April 2015 and September 2018. And, of those 162,047 – or 69% – were recommended to transfer out, which is a considerably greater number than originally estimated by the FCA.
Webb, however, has some sympathy with the regulator. He points out it was unclear whether the FCA knew about Osborne’s plans before his Budget speech.
“The decision to do pension freedoms wasn’t made a long time before the 2014 Budget,” the then-pensions minister reveals. “Nobody knew a long time before the Budget. Whether the FCA knew before or not, frankly, would not have made a lot of difference, because it would only have been a matter of a few weeks either way, I suspect.
“[The FCA] may have [known],” he continues, “but it was such a politically sensitive and market sensitive announcement. Let me put it like this: there were times when I knew it was coming when cabinet ministers didn’t. That’s how tightly controlled it was. Certainly it wouldn’t have been widely known in the FCA, [although Osborne] might have had a trusted contact who read it through and gave feedback.
“The other thing is,” Webb adds, “I think it was always inevitable that the regulatory regime would have to be evolved once it went live. Nobody expected the volume of DB transfers that happened.”
PA requested an interview with someone at the financial watchdog to ask about its pension freedom preparations. The regulator has not responded.
Since the early consultations on pension freedoms, the regulatory regime has indeed evolved, which we will cover in greater depth later in this series. Unfortunately, it was after poor practice had taken place within the DB transfer advice market that the FCA made some changes.
The British Steel saga is a prime example of poor advice given. The FCA found a third (33%) of DB transfer advice given to steelworkers was unsuitable and, in a further 16% of cases, the regulator says it was “unclear” whether the advice was suitable or not. As a result of poor advice, steelworkers have had to claim money from the Financial Services Compensation Scheme. So far, the lifeboat fund has paid out more than £1m in compensation to those advised by a single advice firm, Active Wealth UK. However, plenty more adviser firms helped transfer steelworkers.
‘They bare some responsibility’
Another former pensions minister, Ros Altmann, who held the post shortly after the freedoms were introduced, is of the opinion both the FCA and the government are at least partly responsible for the consequences caused by DB transfers. She believes they should have better implemented the freedoms and done more to protect consumers.
“I think [DB transfer mis-selling] was utterly foreseeable,” she argues. “And I’m not clear why the £30,000 value was chosen. The government could have chosen a lower figure and could have made sure there was a requirement for bona fide advisers, rather than anyone who calls themselves an adviser.”
To better protect consumers, Altmann says those wanting to transfer should have been auto-enrolled into a free guidance service. She believes such a proposition could have acted as a gatekeeper to minimise the damage for those exposed to scammers.
Despite the mis-selling and poor advice in the area, Altmann remains a fan of pension freedoms: “It’s right that people should have the freedom to not have to buy an annuity – it was the wild west financial market.
“The compulsory annuity purchase was more flawed, potentially, than the current system and certainly the current freedom – if that freedom is combined with proper free, impartial guidance, and ideally advice. An annuity is not the best route for most people.”
While it is clear the government and FCA underestimated the impact of pension freedoms on DB transfers, the speedy policy implementation did not make things easy for advisers either. For advice firms large and small, pension freedoms proved a new challenge to adapt to. For example, Rowley Turton Chartered financial planner Scott Gallacher did not have any help from the regulator when he had to prepare his small, Leicester-based advice firm for the changes.
“I can’t recall receiving anything specific from the FCA and I doubt they would have sent anything,” he says. “I was extremely worried that the vast majority of people ‘freed’ from the security of an annuity income would drawdown their money far too quickly. Fast forward 10 years and I fear many people will have exhausted their pension pot and have perhaps only a leaky conservatory or rusty caravan to show for it.”
In terms of preparedness, Gallacher says his advice firm already had high levels of qualifications, including the pension transfer specialist qualification, and so they were “well prepared”.
At the other end of the scale were the likes of national IFA Chase de Vere, which has 16 offices across the UK. Upon Osborne’s announcement, the firm immediately tried to find out as much about the changes as possible and how it should communicate them to its employees and clients. Patrick Connolly, a Chartered financial planner at the firm, says Chase de Vere immediately set up an internal ‘Pensions Advice Project’.
“The project group consisted of, for example, our technical advice services team, which were tasked with understanding the changes and determining what impact they would have on the advice we gave to our clients,” the Chartered financial planner explained. Alongside that group, its professional development and training team had to train its advisers, paraplanners and other staff, while its legal and regulatory experts had to ensure its advice continued to be suitable and compliant.
He adds: “Our adviser management teams needed to consider how the changes to our advice proposition would impact on our advisers and our clients. Our Marketing and Communications teams had to provide information and communicate internally and to our clients and professional contacts.
“The project group worked incredibly well, this showing an advantage we have of being a well-resourced firm. We didn’t need to rely on third parties to ensure that we were fully prepared for when the changes came into force in April 2015.”
Why does this matter?
The last two years have seen the regulator take a verbal beating from MPs and advisers alike. MP Frank Field, for example, very recently accused the FCA of “lumbering into action” after it finally decided to consult on banning contingent charging – a measure MPs suggested some 18 months before.
Since the British Steel saga, the actions of the financial watchdog have faced greater scrutiny and it is now evident the FCA is taking a firm stand on mis-selling and poor advice in the world of DB transfers: “We will close down firms [over poor transfer advice],” the FCA’s Megan Butler told PA less than two months ago.
And, while the regulator has arguably been slow to acknowledge there are serious problems in the sector, the “consequential implications” Osborne made a vague reference to in his Budget speech all those years ago have turned into millions of pounds being paid in compensation.
As a consequence of poor DB transfer advice, FSCS levies have risen, professional indemnity costs have shot up exponentially, and advisers continue to drop out of the DB transfer market, judging it too risky. Indeed, a detail that was almost completely overlooked by the government has become the very thing that has come the closest to putting the brakes on people attaining the sole purpose of its policy: freedom of choice.
As for the responsibility that lies at the feet of the regulator and government, former FCA board member turned economic and social justice campaigner Mick McAteer puts it well: “The… party that really needs to take responsibility is the government because it rushed through pension freedoms and choice reforms without really giving enough time to put the necessary protections in place, so it was kind of forced on the FCA. But at the same time, the FCA could have moved quicker to prevent this particular type of mis-selling.”