The retirement revolution
On 6 April pensions freedoms are changing dramatically. Will this sea change cause retirees to go overboard with withdrawals or spending?
Pensions minister Steve Webb may well regret quipping in March last year that pensioners should be free to blow their cash on a sports car. Attaching the word Lamborghini to the word pensions suddenly made the whole concept seem faster, more exciting, sexier. But is that really how pensions should be seen?
On 6 April people over 55 will be given greater freedom over how they spend and invest their retirement pots. No longer will retirees be required to buy an annuity to provide them with income until their deaths. Instead, all savers in defined contribution (DC) schemes will be able to access their funds via invest and drawdown schemes, and will be able to dip into their pensions pots, taking cash. According to Jacqueline Reid, managing associate at law firm Linklaters, the changes are due to the fact that “DC pensions need to be providing value for money”. “Annuities are very expensive,” she adds. “This is a sea change for DC. It’s one of the biggest changes we’ve seen for a while.”
What this could mean is still a subject of debate, despite the fact we are only a month away from the changes coming into effect. “It’s still quite early days and everyone is very uncertain,” says the NAPF’s head of policy and research Jackie Wells. “People like the concepts of freedom and choice, but in a marketplace where solutions are not fully formed, it’s quite a scary concept.” And many providers are still waiting to see what their competitors offer before revealing any shiny new solutions.
Freedom and choice
Pensions expert Ros Altmann, who is the government’s champion for older workers, believes we are “in the middle of a pensions revolution that will enable people to rethink retirement”. She thinks the new freedoms could allow people to reshape how they retire, perhaps drawing down some money but continuing to work part-time, for example. “I don’t think people have realised how powerful pensions are in the new freedom and choice environment,” she adds. “I don’t think people have realised what’s happened by not locking people into an annuity and getting rid of the 55% charge in death [the ‘Death Tax’ on pensions funds].”
So, on 6 April, will your organisation’s pensions manager arrive at the office to find a queue of people outside their door desperate to withdraw savings from their pensions? Experts are divided. Darren Laverty, director at pensions advisory firm Secondsight, says he thinks the whole thing is “a bit of a Millennium bug”, although he concedes “the worry is still there” for HR professionals about how to “stop people going out and doing anything stupid”.
Lydia Fearn, head of DC investment consulting at Barclays Corporate and Employer Solutions, agrees that “the world won’t change on 6 April”. But, she adds, people will ask: ‘can I move my money?’ “We need to equip people to be able to answer that question,” she says.
Not too surprisingly, given this is the biggest thing to happen to pensions since auto-enrolment, HR magazine has been drowning in press releases and research since the start of the year. Headline statistics include the NAPF warning 5.9 million people risk making poor financial decisions after the reforms come in; Jelf Employee Benefits claiming seven in 10 employers have taken no action regarding the freedoms; and Hargreaves Lansdown predicting half a million people will be transferring out of defined benefit (DB) pensions schemes to embrace the new pensions freedoms.
Towers Watson senior DC consultant Will Aitken cites the fact that “annuity sales have halved since the budget [when changes were announced], which suggests some people will take the money as cash”. “Five million people could take it up,” he predicts. “And with the changes that could come with the election, people might take the money first [in order to avoid any changes to higher rate tax relief].”
Jonathan Watts-Lay, director at financial education company Wealth at Work, also believes the “massive fall off in annuity purchase” is significant. “All those people who could have retired but haven’t must be waiting for April,” he says. “There has been a constant flow of people retiring and now it’s fallen through the floor. The only logical explanation is that people are waiting.”
Furthermore, Watts-Lay worries there will be a “fundamental mismatch” between employers and employees, with people expecting to be able to take advantage of the new freedoms, and employers not yet set up to offer them. “We know through talking to employees that people think they can use their pensions like a bank account,” he says. “From a legislative perspective, they can, but not from a practical perspective as organisations aren’t going to let them. People are going to get frustrated.”
Research from pensions consultancy Xafinity backs this up, warning that millions of people will effectively be ‘locked out’ of accessing the freedoms, due to 58% of occupational pension schemes still being undecided about what to do.
Employers are uncertain
Most of the employers HR magazine spoke to were still considering their options. Ruth Patten, group rewards and benefits manager at manufacturer Scapa says she is “still working out what to offer in April”, although she has written to all her DB members to ask if they want to transfer to flexible DC schemes.
Roger Fairhead, group head of compensation and benefits at SAB Miller, says the company will be communicating how employees near retirement can access the flexibilities, but will hold off making any big decisions until after the election.
Both Patten and Fairhead welcome the changes in theory. But both also worry about how they might work in practice. “The changes are welcome but in the broader sense I’m not convinced employees are equipped to deal with them,” says Fairhead. “Choice is a wonderful thing, but it’s no good unless you know what to do with it, and that’s the bit that’s missing.”
“I do have some trepidation,” adds Patten. “There’s not a lot of information about how this will work in practice. It’s new ground for everyone and I think the next 18 months will be full of iterations. We have got to make sure people really understand what these changes are.”
Lesley Williams, group pensions director at Whitbread, is even more worried, and unlike Patten and Fairhead did not welcome the changes, which she said “came from nowhere”. “I’m disappointed as I think auto-enrolment is a great policy initiative,” she says. “I understood we were doing auto-enrolment to help people have an income in retirement. To remove that seems counterintuitive.”
“People like the word ‘freedom’ but it worries me,” she adds. “People might think something sounds sensible, but it isn’t, like taking their pension out and putting it in a building society and managing their income themselves. If they were knowledgeable, they wouldn’t do that.”
Williams’ fears are not unfounded, especially given Whitbread has a lot of relatively low-paid workers. Aitken says there is a sense that “people with small funds who are in financial distress may take the opportunity to do something”. And Fearn says there is a risk that people “might be seeing pot sizes they have never had before”, making the option to take the cash all too tempting.
Complexity and lack of employer readiness to deal with queries may also encourage people to take the money and run. “If people get annoyed and frustrated, they will take the cash out because that’s the easiest thing to do,” predicts Damian Stancombe, head of workplace health and wealth at pensions consultancy Barnett Waddingham.
“When faced with a complex set of options and with their schemes not providing an easy solution, we may see people turning to the wrong options,” agrees the NAPF’s Wells. “It seems easier to take the cash, put it in a bank account and dip into it. Then they have no fall-back possibilities.”
The changing shape of retirement
Whatever happens on 6 April, one thing that can’t be ignored is that the shape of retirement and the concept of a pension appears to be fundamentally shifting. The changes are just helping it happen a little bit faster.
“The interesting thing is there are three stakeholders in all this: the government, who are pushing employers into offering welfare, employees (the beneficiaries), and employers, who no-one is consulting,” says Stancombe.
He believes the central question – why do I offer a pensions scheme in the first place – has been lost. “The corporate objective is to make people retire, otherwise you are going to have an ageing workforce and all the problems that come with it,” he argues. “Freedom has broken that link.” He goes as far as suggesting freedom has “killed the word pension”, as people years away from retirement can access their savings.
“Under the new rules, people can take the money and not retire,” agrees Watts-Lay. “But employers are still paying for retirement. Generous contributions exist to manage the workforce out through retirement.”
Wells adds that the combination of the removal of the default retirement age and the introduction of freedom and choice is “creating uncertainty” for employers who may suddenly feel they don’t know how to manage their workforce. “If employers find employees take the money and spend it, and then can’t retire, they might feel out of control with their workforce,” she explains. “Pensions then aren’t a tool for retirement and we may see a disconnect between pensions and retirement, which is very worrying from an HR perspective.”
Aitken points out that there is already a “polarisation” among employers when it comes to how they view pensions and retirement, which may be exacerbated by the changes. “Some employers have a high enough turnover and pensions have become just another savings option; others [see pensions as] a machine to retire people at the right age,” he explains.
The future of pensions
The rhetoric around pensions seems to be changing, with even the NAPF now referring to the concept of lifetime savings. Employers are also increasingly thinking in these terms. Patten says she has adopted the ‘lifetime savings’ terminology as “pensions turn people off”. While her priority right now is to help people understand the flexibilities, she is keen to explore other options like ISAs in future. And Fairhead thinks there “must be better words than pensions and retirement” and is broadening SAB Miller’s investment offering.
Stancombe believes that with a ‘job for life’ looking increasingly out-dated, “gold-plated pension plans” should similarly be on the way out. “If people are moving jobs 11 times, [why are employers] providing a benefit that is a reward for long service?” he argues. “It has got to be replaced with something more appropriate. I see a longer-term trend where employers reconsider the value of pensions.” He wants to see employers focusing on wider workplace savings schemes, such as helping employees to buy a house or get out of debt.
In the public sector, freedom and choice are obviously less of an issue given final salary pension schemes, but with an ageing workforce and other major pensions changes, the evolution of retirement is still front of mind for Mandy Coalter, director of people at education charity United Learning. Coalter is part of a Department for Education working group on the subject of teachers working longer and the issues this will bring.
“In society, there are challenges around age discrimination, whether real or perceived,” she says. “We [in education] don’t have many people working beyond 60. But we don’t know what the world is going to be like when it’s not a choice, it’s a must. As a society, we have to start thinking about our attitudes towards older people in the workplace.”
On the subject of pensions specifically, Coalter says she is unsure whether when she comes to retire, the state pension will even exist (and she’s not alone, 2014 research revealed one in six MPs think the state pension won’t exist in 30 years).
“Young people need to realise they have to look after themselves,” she believes. “There’s still a big reliance on the state, but as we get an increasingly older population and a shrinking working one, that’s just not going to be sustainable. It’s a huge issue for society. This generation needs to start assuming you need to plan ahead and look after your own retirement and care. I can’t see it going any other way.”
A shared objective
For Watts-Lay, it’s about employers and employees having a “shared objective” – to be able to retire at a suitable time and have the income to be comfortable. “The question is: How are you going to help your employees get to that point?” he says. “If you don’t explain that shared objective, you won’t make it.”
Fearn likes the idea of “a living pension”, making employees aware of the amount they need to save to have a comfortable yearly income. But she also advocates “moving to a long-term savings plan” rather than just a pensions pot. “Retirement is not a line in the sand, it’s becoming more of a blur,” she says. “It’s about helping people [with] short-, medium- and long-term savings.” Or as Darren Laverty from Secondsight puts it: “It’s a retirement journey, not a pensions plan.”
However Wells, although she does agree retirement is increasingly a “gradual change” rather than a “cliff-edge”, is more sceptical. She thinks retirement is still seen as “an event” by many people. “Not everyone recognises that move to a transition,” she says. And, she points out, while “transition is a really nice idea, the jobs aren’t out there”.
And with a study by the International Longevity Centre (ILC) finding 60% of people aged over 55 have not made a plan for retirement, it’s evident many may end up working longer simply because they have no choice.
On 6 April, the new freedoms may well land with more of a whimper than a bang; a recent study from the ILC found 70% of people aged over 55 would prefer their pension to deliver a guaranteed income for life, with only 7% considering paying for big-ticket items like a car, and a further 5% wanting to use their pots to pay off debts.
But as Aitken points out: “What happens on 6 April is not going to be the same as what happens in a few years’ time.” Whether it will be to the good remains to be seen, but the evolution of retirement is only going to become more imperative for employers.
Check back tomorrow for more on how the upcoming pensions freedoms will affect HR