Pensions freedom is at risk – from the regulators
AS COMMENTATORS digest the liberal reforms to pensions announced in the Budget last week, questions are starting to arise about just how the proposals will be implemented.
To be clear, we welcome the reforms; it is right that people should be empowered to make their own choices about how they access a pension fund which is, after all, their own money. But such an approach, putting responsibility for choice back on to the consumer, stands in stark contrast to where Britain has been going in terms of regulatory policy in financial services. This policy can, at times, appear to be seeking to protect consumers against making any choices of their own, while providing compensation automatically when choices turn out to be less than optimal.
How does this apply to pensions? One tripping point may be the face-to-face “guidance” (not regulated “advice”) which is to be made available to people at retirement. Aside from the logistics of this, the experience in the market of attempting to provide “guidance” to consumers on financial matters has already been, at best, fraught.
The FCA is on record as saying that, in this process, if the consumer believes at any point or subsequently that they received “advice”, even if they really just received information or “guidance”, then “advice” is what they received. This is a regulated activity, with attendant financial liabilities for the financial institution if things are subsequently deemed to have gone wrong. Because of the potential liabilities, market participants have steered clear of providing “guidance”.
The proposal is to allow people access to the whole of their pension fund directly, taking money from the fund in whatever amount they want, when they want, subject to tax. It is possible to do this to some extent today under the regimes for “flexible drawdown” for capital access to the fund and “capped drawdown” for regular income.
Yet pension providers have expressed some reluctance to enter the market for flexible drawdown, for fear of future mis-selling claims. The regulatory rule-set, biased heavily in favour of annuity purchase, has also meant that even capped drawdown has remained a minority sport.
Some providers will not accept drawdown business direct from even their own customers unless regulated advice has been provided first. People who know what they want to do without advice are therefore prevented from doing it. How will the FCA react to an environment where no product structures will be required, and where consumers will have the apparent right to take their whole pension fund in one go, if they want to?
If these proposed new freedoms are to work in practice, we need to move to a place where individual choices are supported and respected by the regulators. In this environment, we need to accept that some people will make less than perfect choices in some cases and that, as individuals, they will have to live with the consequences of that choice. This is a long way from where we are today.
Malcolm Small is senior policy adviser for financial services at the Institute of Directors.