Without proper support from pension professionals, savers are left vulnerable to attacks on all sides, says Henry Tapper.
While most readers were doing "proper subjects" like maths, I studied English for A level and studied the conceits of metaphysical poets. A conceit is an extended metaphor and tests how far an idea can be taken. Here's a conceit.
This year, a group of us organised defined contribution (DC) pensions into a map, which looked like two hemispheres: the known world was that of Professional Pensions and dealt with saving for retirement; the other hemisphere was "terra incognito", the world of independent financial advisers (IFAs), annuities, and pension freedoms.
The map made it clear that, to get to the point where we knew how to spend our retirement savings, we'd have to get to know this new-found land. So, over the summer, AgeWage invited pension professionals into our WeWork office to meet its natives.
We found that, when you want to pass from the safe waters of workplace pensions to the vast ocean of retirement, you need to take tough decisions, usually under time pressure and in a stressful environment.
Our cartographic conceit suggested this process was like sailing the Strait of Hormuz. Your craft, laden with the rich cargo of your retirement savings, is vulnerable to brigands from all sides; you can even be hit by friendly fire from those trying to protect you. In the pensions Strait of Hormuz you are a vulnerable customer.
A quarter of the world's oil passes through the Strait of Hormuz - and a similar amount of our retirement wealth passes out of workplace pensions into drawdown, annuities, and people's bank accounts. Some of the barks fall prey to brigands, and many run aground with the money beached in bank accounts.
And yet, once we have seen our staff sail off, we turn back to assiduous governance of our savings plans, preparing to let another cohort of savers brave Hormuz with precious little protection.
Financial Conduct Authority (FCA) statistics tell us that, of the 650,000 DC plans accessed last year, 350,000 were fully withdrawn, and of the 190,000 plans "in drawdown", the majority had simply busted the tax-free cash. Only 71,000 people bought an annuity and most of these were bought on a fixed term rather than a lifetime basis. People are not converting their retirement savings into a wage in retirement.
To return to my conceit, are we - as pension professionals - protecting those we profess to serve?
The FCA is concerned about its numbers and has suggested a number of "remedies" that it hopes will provide people with the "choice architecture" they need to take shockingly difficult decisions at retirement.
These centre on investment pathways, making "cash" an active, not a default, choice, and disclosing the costs of retirement choices. The FCA hopes that this will improve decision making.
As pension professionals, I guess we want to see people converting retirement savings converting into a pension - "an income that lasts as long as you do". We will have to wait and see if these remedies make a material difference when they are implemented.
In the various workshops we ran over the summer, it became clear to all the pension officers attending that, for all the work we do in helping people to build up pensions, we are woefully short of data on the choices people take when retiring. An annuity broker who attended the meeting stated millions is spent each year advertising on Google rather than linking with pension managers. Ruston Smith spoke of the difficulty that large schemes have in finding good IFAs who will work all members.
It may be time that we spent more of our DC governance spend on protecting those retiring, or the "Strait of Hormuz" may become more than a literary trope.
Henry Tapper is chief executive of AgeWage
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