Instead of using the ‘f-word’ to describe the pension reforms that mark their second anniversary today, says Stephen Lowe, it is a shame they were not badged ‘opportunity and choice’.
Two years on from the pension ‘freedom’ reforms, how many of today’s over-55s are enjoying their new-found liberty? Certainly they are experiencing more choice and flexibility – I am just not so sure this complex new world is really their idea of freedom.
In the run-up to the general election, promoting freedom ticked all the right boxes. Who would vote against it? It is a deliberately emotive word designed to appeal to people’s hearts rather than their heads. This kind of words paint an attractive picture of a better future – as the brains behind ‘pension liberation’ schemes fully understood.
Although the 2015 reforms did raise the possibility of a better future, it was by no means guaranteed. For every savvy investor relishing the new choices, there are likely to be two or three with far lower levels of financial capability or resources, who are struggling with the complexity and risks and unwilling to pay for professional advice.
Although it is still early days in this multi-year experiment, there is plenty of evidence things are not going totally to plan – retirees paying five-times more tax on flexible payments from pensions than expected during the first year; low take-up of the free Pension Wise guidance service; fewer retirees shopping around or switching providers to obtain better returns or lower costs; an increase in the number of pension scams; higher levels of inertia and people taking higher risks for uncertain returns. In the last few days, one survey has suggested two-thirds of over-55s are not clear what the changes mean for them.
Although the old pension rules did impose many restrictions, it was often for very good reasons. There is a long list of behavioural biases that affect financial decision-makers. The rules existed to nudge mass-market pension savers in the right direction by not taking too much risk or submitting to short-term thinking with money that has to last a lifetime – however long that turned out to be.
We could laugh at the idea of such old-fashioned paternalism – except today most of us support the equally strong nudge of auto-enrolment during accumulation. By contrast, decumulation has become a free for all.
In limbo
At the moment then, we are in limbo. Greater choice is not yet fully supported by greater financial capability or greater willingness to seek help. Significant numbers are likely to be making sub-optimal decisions but we do not know who they are or when problems might emerge.
We have some knowledge of what is happening to single pension pots, but we do not yet understand how people are using their pension and other wealth in aggregate. We lack any kind of early-warning system to alert us to trouble ahead.
Introducing nudges or defaults is one potential answer. This is exactly what they are doing in Australia right now where the government is worried that retirees are living poorer lives in retirement than they need to – particularly those who are so worried their pension pots will dry up they take the minimum incomes possible.
The message being sent is that individuals should exercise their freedom to offload longevity and investment risk in later life rather than try to control it all by themselves.
Back in the UK, it is a shame the pension reforms were not badged ‘opportunity and choice’ instead of using the ‘f-word’. Freedom feels like something you have bestowed on you from above – that makes your life better without having to lift a finger. In contrast, opportunity suggests the potential for better outcomes for those taking an active decision to reach out and grasp what is on offer.
Stephen Lowe is group communications director at Just
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