How to get to grips with pension changes

Colin Williams, director of corporate, Friends Provident, discusses the dramatic reshaping of the pensions industry.

If pensions A-Day in 2006 marked the industry moving towards simplification and flexibility, you might say we are fast-approaching an increasingly inevitable D-Day. As the noise of reforms, legislation and deregulation steadily builds to a crescendo, it becomes clearer how dramatic the reshaping of the industry will be; uncertainty remains, but the ongoing assault on the status quo is certain to usher in new opportunities over the next 12 months and beyond.

Looming largest over the industry’s head is RDR and auto-enrolment. The debates around each of these could warrant a tome to themselves, but with auto-enrolment in particular, the impact is particularly widespread. Whatever the merits of the arguments for or against the make-up of NEST, there can be little doubt that pensions and savings will be brought kicking and screaming into the public consciousness.

However successful the roll-out of NEST, with RDR aiming to instil greater professionalism in advice and broad steps taken to promote and simplify private saving through various reforms, our industry is also being groomed as a timely buffer and panacea to the wider savings problem.

Reforms

While we inch closer towards RDR and auto-enrolment, we contend with reforms being ushered in with increasing speed. Removing the need to annuitise by 75 had headline-grabbing qualities – an antiquated requirement replaced by greater freedom and choice.

Yet this coverage will almost certainly need tempering by reality: capped drawdown will remain unsuitable for the overwhelming majority and the likely lower withdrawal limit of 100% will not wholly negate the risk of incomes being exhausted prematurely. If the net impact of this measure suddenly seems marginal, it is, more generally, likely to invigorate interest in retirement options and promote a greater, ongoing need for advice post-NRD.

This growing interest may be further amplified by another high-profile deregulatory move, the decision to scrap the default retirement age. Acknowledging a growing appetite among UK workers to prolong their time in employment, the decision has polarised opinion: a uniformly supportive TUC and a scathing rebuttal from the Institute of Directors perhaps the most telling opposites. Yet with 40% of people planning to work beyond age 70 according to Friends Provident’s Visions of Britain 2020 research campaign, employees are likely to embrace this decision in droves.

Navigating through uncertainty

As people look to keep active in the workplace for longer, so they are more likely to remain active with their savings; a demand for greater flexibility and choice is sure to accompany this trend, which is further compounded by the knock-on effects of other seemingly unconnected developments. For example, accelerating the state pension age rise will leave many needing to plug the gap by extending their employment or looking more towards their private provision; not least the estimated 500,000 women between 50-55, who in some cases could be left with an unenviable seven years to prepare for an extra two year wait for their state pension.

The short term demand will be to navigate people through this uncertain period, but the legacy of these measures will be a need for guidance on the more flexible choices available.

The state pension reared its head again recently with proposals tabled for a universal flat-rate payment. The hope must surely be that if uncertainty breeds indifference, this approach will mean that clarity replaces inertia and sound retirement planning will become both obviously important and palatable.

That the state alone will provide adequate support in retirement is the great myth that we have not been able to debunk. This measure will not only provide the clearest notion of what people can expect from the state, but should discourage people from opting out of auto-enrolment.

Intertwining reforms

You can begin to see how these reforms intertwine with each other. The sum of its parts, simplicity and clarity, can be extended to reforms away from pensions and savings as well. Take for example welfare reforms, set to be embodied in a universal credit that would streamline the current benefits system. This proposal may impact on particular groups, it will at the very least offer people a clearer understanding of their finances.

With this control, and the visible need to save for retirement, suddenly the benefits of developments such as corporate platforms take on an added relevance and could emerge at a moment where people are better equipped and encouraged to save over the short and longer term.

This watershed moment for pensions and savings may be leaving us gasping for breath. But Iain Duncan Smith’s lofty ambition to ‘make it crystal clear to young savers that it pays to save’ could be the coup de grace for savings inertia in the UK. This directive must continue to inform the decisions the coalition makes, but the industry must seize the initiative it is being handed. Changes to pensions and savings will continue to circle like confetti at a wedding, but private provision, so often the bridesmaid, is ready for its big day.