George Osborne’s pension reforms stand comparison with the council house righ-to-buy revolution of the 1980s.
This is a scheme that is not only changing how individuals interact with an economic asset, it is also changing their sense of self. This is all about individual personal ownership and responsibility.
In a post-final salary scheme world, where the retirement prosperity of millions depends on the decisions they take for themselves, the providers and facilitators of these freedoms have a critical role to play.
To use another analogy, if this is a gold rush, then we are the ones selling the shovels, the supplies and the maps; without us, there will be no gold.
New normal
From a platform provider point of view, we are still dealing with the new freedoms in an exploratory way.
It is too early to discern what the new ‘normal’ might look like in terms of investor behaviour and requirements.
We do, however, have a wealth of experience of what investors are telling us they want and how their activities have changed compared with the pre-freedom regime, as well as some early pointers as to what might happen next.
The first thing to note is that annuities are toast, at this stage at least.
It would be an error to write them off altogether and in the fullness of time demand will re-emerge.
However, for now, all the investor activity is around drawdown and uncrystallised funds withdrawals (UFPLS).
Of all the transactions we have dealt with in this tax year, 75% have been drawdown, around 16% have been UFPLS and about 8.5% have been annuity purchases.
This is the early wave of demand, though, and we also know investors do value security of income in retirement. Annuities should recover some lost ground but they will not go back to the 80% of market turnover levels they enjoyed only a couple of years ago.
The challenge for platforms is that while the rhetoric from the chancellor of ‘bank account’ pensions may have been somewhat misguided (like his free ‘advice’), investors are coming to expect and demand a level of flexibility the industry is unaccustomed to delivering.
Platforms that cannot accommodate irregular income distribution requirements at no charge, flexibility of access and online management, simple switching and control, full visibility of assets and of costs, are going to struggle in the new world.
As an industry, we are laughably behind the times in dealing with the movement of client assets around the system.
Transfers to our platform that are not conducted electronically currently take around 28 working days.
Even electronic transfers take around nine working days.
We have to get to the point where it takes nine minutes.
Both Origo and, more recently, TeX have done excellent work in improving these turnaround times but it still requires another quantum leap in standards.
I suspect that if we as an industry do not sort this out for ourselves, then one day soon the politicians and regulators will impose change on us from outside.
Retirement dashboard
One of the areas of greatest confusion for investors has been tax.
Our industry has to take the complex world of taxation – and emergency tax codes – and make it accessible for investors.
The complexity may not be our fault but it is our challenge to resolve.
This is about communication as much as it is about functionality but it is clear that, on this issue, investors’ expectations are not currently being met.
I was struck by our research that showed one of the principal reasons investors were looking to withdraw cash from their pensions was to reinvest in ISAs.
Looking ahead to development plans around the concept of a ‘retirement dashboard’ recently advocated by the Financial Conduct Authority and others, the challenge for platforms and the industry will be to extend the information map presented to investors to show all their assets and liabilities in one place.
In time, they need to be able to see their pensions, ISAs, investment accounts, cash, house value, state pension, annuity income and their long-term care liabilities on one page.
We have still got a lot of work to do – but this is where I think we are heading.
