The run up to a revolution in pension investment and planning is reaching a peak. If you do a news search for ‘retirement freedom’, it returns over 600,000 items. Not in over a generation has there been so much interest and energy about pensions and decumulation products as 6 April 2015 approaches and speculation mounts about what people over 55 will do with their new found freedom with retirement pots.
Will there be a surge of withdrawals? Could large amounts of money exit insurers’ coffers? Maybe not to buy the proverbial Lamborghini but more likely to pay off credit cards or fuel the next “buy-to-let” bubble, which according to the Council of Mortgage Lenders data, is already happening, given the 23% increase on buy-to-let mortgage loan numbers in 2014.
The Treasury has revised upwards by 200,000 their estimate of the number of people who will be seeking to withdraw pension funds following April 6, and each passing day brings another estimate of the volumes of demand, with some estimates suggesting the total number could be 450,000–500,000.
The Industry Response
Pension providers are relatively bullish in their own assessment of readiness and have ramped up key resource levels and many new products. Or more accurately, variations on a theme are being announced in the run up to “Retirement Freedom” Day.
Advisers are signing up with the Money Advice Service and are “open for business” … for those who can afford the fees of course! Occupational schemes are trying to meet the challenge of balancing their actual and moral obligations to their members, with the need to avoid regulatory or reputational cost. Industry players are scrambling to get enhanced products, services, tools and routes to the consumer ready in time to meet the opportunity.
The Picture in My Crystal Ball
One scenario, potentially generated by a balloon of late coverage in the popular media and coverage of the Budget, is that people close to (and of) retirement age will make initial online enquiries and research their options, which could turn rapidly into the need for a conversation. The normally quiet set of “orphan” and direct customers suddenly become very active, and look directly to their pension provider as their first point of call.
Worst Case Scenario?
Proactive providers with call and service centres, will ramp up operational levels to cater for volumes above the new capacity; contingency plans will be invoked and additional resource rapidly brought to bear in providing the guidance and subsequent servicing and execution needs. Pension Wise will deal with volumes of initial queries but these are soon outstripped by referral volumes from providers and schemes with non-advised members. Referrals to IFAs on the Money Advice Service register soon leads to disappointment and public unrest, when the supply of free initial consultations is outstripped by demand. So, occupational schemes could find that “outsourcing” guidance to Pension Wise is not a viable option in the short-term.
This could leave a bad taste of disappointment and frustration across UK retirees and the industry; press and media headlines only being displaced by election news. The industry overall has dealt with major surges in the past and the “bow wave” of demand will be dealt with as volumes reduce over the latter half of 2015, and everybody breathes again… until we look at the unintended consequences of having to employ a tactical response.
Customers Could Revolt
Angry and confused customers will complain about poor and error laden service – either officially or to each other. They may have received inconsistent guidance that accidently became advice, and so the resultant backlog of errors may in fact be more than administrative and qualify as breaches. Given the short notice on guidance and lack of clarification on this and the second line of defence from the FCA, it is more than likely that some providers will unwittingly make mistakes and the result could be a whole new posse of “ambulance chasers” to hound the industry for recompense and remediation.
Or a Better Case Scenario?
We could see a significant but slower ramp up when people quickly realise that this is not bonanza time and think about their futures; and in fact, the election is more interesting than pensions in the short term. As a consequence, demand peaks later, when customers perceive a risk to tax free lump sum levels and/or future tax relief. Most people enter into a lengthy and ongoing dialogue about their future choices, demanding a much more consistent and progressive customer management model to be in place.
I freely admit, my crystal ball is only so good and we will have to wait until 6 April to find out but in the meantime, irrespective of what I, the Treasury, or other pundits say, “nobody knows”...
So, Who Will Be the Winners and Losers in the Industry?
Retirement Freedom and Choice marks a fundamental “wake up” call for the pensions and personal investments industry. We believe that the winners will deploy business models which are:
- Customer-centric – drive everything they do from the needs of the customer
- Evolving – be able to adapt their products and services to deal with the expected future changes in the regulatory and market environment
- Sustainable – providing both value for money to the customers and commercially viable products and services. This will be underpinned by effective and compliant operating models
Wouldn’t all of us involved in this industry like to think that the true winners will be the UK retirees both now and for years to come?
Are you interested in starting a discussion on Life and Pensions? Connect with Malcolm Harrington on LinkedIn .