Further reforms needed to 'future proof' freedoms - ABI

Further reforms are needed to 'future proof' the success of pension freedoms the Association of British Insurers (ABI) has said, with new research revealing a "black hole" on guidance and advice.

The ABI's report, Five years on: future-proofing the freedoms, has revealed concerns that pensioners could risk running out of money if they continue to withdraw cash at the current rate.

Full withdrawals have risen to their highest level since the introduction of freedoms in 2015, with 40 per cent of withdrawals at an annual rate of 8 per cent and over, with the report noting that this is “not sustainable” for most savers.

ABI outlined a number of recommendations within the report, including calling on The Pensions Regulator to adapt rules on guidance and advice in order to encourage a “step change” in the support offered to members.

It has also urged the Department for Work and Pensions to introduce a requirement for schemes to send members requesting a transfer out of a defined benefit (DB) arrangement a letter outlining the risks.

This also follows the Financial Conduct Authority's Sector Views report, which recently revealed that unsuitable transfers from DB schemes could cost members up to £20bn over the next five years.

In addition, the association has called on the government to set up a retirement commission to advise on policy changes, and on the Money and Pensions Service to develop a later-life review.

ABI director general, Huw Evans, commented: “The pension freedoms have revolutionised retirement finances, giving people greater flexibility with their pensions.

“So far over £30bn has been accessed from pension pots, with latest figures showing that, in 2018/9 alone, over 350,000 pension pots were fully withdrawn. But the changes have also placed much greater responsibility on savers to ensure that they make the retirement choices that are right for them.

He added: “Further reforms and safeguards are needed, as too many people are making complex and vital retirement decisions without help. According to FCA data in 2018/19 nearly half - 48 per cent - of people who accessed their pension pots did so without regulated advice or guidance”.

However, PLSA head of DC, master trusts and lifetime saving, Lizzy Holiday, added: “The pension freedoms offer savers flexibility and choice in how they access their retirement savings, but also present significant risks that need to be managed to ensure savers receive good outcomes. To achieve this, it is essential that savers have access to appropriate guidance and advice arrangements, and we are pleased to see that this is a major focus of the ABI’s report.

“However, we do not believe that the FCA’s investment pathways are an appropriate solution for occupational pensions – they are a solution to a specific issue in the contract based sector. There are differing drivers, protections and benefits for savers in trust based schemes.

“We anticipate that consumer needs will change as automatic enrolment (AE) evolves, pot sizes increase and DB entitlement becomes rarer. As AE was designed to rely on inertia, it is not clear the investment pathways solution will be appropriate for future cohorts of retirees, who may require different levels of help and support to current retirees.

“To satisfy these needs, we believe a more comprehensive approach is required in the long-term and that the trust-based sector is well-placed to deliver it."

Commenting on today's report, Just Group communications director, Stephen Lowe, added: “Examples from other countries who have been in this position provide evidence that poor outcomes could be either people taking too much, too soon and running out of money too early or from hoarding to ensure it lasts and living much poorer later lives as a result.

“When we asked industry figures whether pension freedom had created more or less certainty for consumers, the answer was that it depends on which consumers. Nearly half (48 per cent) thought the change had created more certainty for high net worth while 13 per cent said less certainty. For ‘Middle Britain’, just 29 per cent said more certainty and 44 per cent said there was now less certainty.

“Clearly a policy that only works for one particular slice of the population but leaves the majority vulnerable is going to struggle to be a long-term success".

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