The Mist Clears

30 October 2014

With the mists of uncertainty that hung over the moors of Scotland for so long now but a distant memory, we have been focusing our minds on the means by which guidance will be provided free at the point of use. There will be 800,000 or so individuals who will retire over twelve months beginning April 2015.

In the run-up to the referendum, institutions as illustrious as Credit Suisse were feverishly predicting the collapse of the Euro and the need to immediately fund Scottish pension fund liabilities in full should those of us “resident north of the border” vote for swapping their subservience to Westminster to a subservience to Brussels.

For the pensions industry, issues arising from the 2014 Budget are arguably far more consequential. The Chancellor has stipulated that there will be free at-the-point-of-use guidance for all individuals at retirement. The validity of guidance on a topic as complex as pension provision inevitably depends upon a wide range of personal considerations to be taken into account to arrive at an optimal decision about an uncertain future. Guidance tells somebody what they need to know in order to make a decision. Advice tells them what they should do. The vast majority of people would prefer to be led by the hand rather than left to our own devices in deciding what is in our best interest.

Nonetheless, a number of agencies have been nominated as worthy, disinterested providers of guidance and the chosen agents, TPAS, which will operate the service over the phone, and the Citizens Advice Bureau, which will deliver face-to-face guidance have both been promoted as organisations whose independence is impeccable and whose ability to sift through a complex set of issues is beyond question.

But 800,000 people will retire next year, and the year after and the year after that.

For the time being perhaps half of them will depend solely on their Defined Contribution savings. Therefore, they will not have any element of their retirement income underpinned by a conventional occupational Defined Benefit final salary scheme. We are rapidly moving into unchartered waters. Consumption among the quarter of the population who are retired is crucial to the financial health of the economy. This group spends quite a lot. We need to know they have a secure income well into the future. Savings into Defined Contribution schemes have been inadequate. At the level which auto-enrolment is currently set there is no prospect of auto-enrolees saving enough to provide themselves with an income. For most people the cost of any serious guidance is unlikely to be justified.

So what’s to do?

Inevitably, the majority of individuals will rationally decide that at least a component of their income in retirement must be derived from a conventional annuity. Being insured against their own life expectancy accelerating away from them and having the confidence that they will have an income predetermined in their aged infirmity will prove overwhelmingly attractive. For the immediate term of course, Quantitative Easing has depressed returns to the level where swapping one’s life savings for a dribble of income is unappealing.

Moreover, the majority of individuals in employment in the UK have accumulated quite a considerable pot of wealth in the form of the equity in their home. Some will chose to trade down, but others will be in a home which is well suited to them as they retire. For them the option of drawing an income against the equity they own in their home will prove attractive. Many faced with the brutal truth of the income which they can derive from their savings, will have no alternative. We will therefore see the market for equity release boom and the market for annuities come back to something of the order of the level before the Chancellor stood up to declare his radical plan for pensions; a plan which has been widely acknowledged as masterful from a macro-economic, fiscal and political perspective, but a plan which is most unlikely to better prepare people for their retirement over the next few decades.

contact Mark Wood
Chief Executive Officer 020 7309 8331