There has been much discussion in the press and the pensions industry about George Osborne’s new Pension Freedoms that come into force today on April 6th.
The debate fluctuates from how the freedoms could create a whole series of new mis-selling scandals to a broad welcome that people are being given more control over their own pension money, rather than being told by government what they should and should not do.
The pensions industry generally welcomes the move, but the discussion seems focus on what others (govt and customers?) can do rather than on how the industry can change in ways that would help customers. The debate revolves around what the public and the government might be doing wrong, rather than whether pensions companies can develop new products to provide what people need.
I believe these freedoms are very welcome, they provide a trigger for change, it is a real opportunity for the industry to create new products that will help customers and transform this business. Until the industry focuses on what it can do to help customers rather than talking about why customers should save more or governments can provide advice and regulation, the public will not be properly served. This post discusses and analyses the opportunity for the pensions industry to develop new products
First: what are the concerns about the new freedoms?
The expert commentary largely revolves around three serious concerns. These concerns add up to a serious worry that the public could be worse off.
- If people withdraw all their pension pots in one go in one year they are still subject to a 25% tax which will be a windfall for the treasury but at the expense of the public’s ability to create income for themselves in the future.
- There are not enough quality advisors available to help people decide what to do and be sure it is in their best interests. And for many the cost of advice is simply not affordable. the government is offering free advice, but this is very limited in scope and seems to be fraught with implementation problems.
- Annuities are still the best option for some people as they ensure they do not run out of money. But they have have been criticised for being poor value. They have a bad press and may be dismissed by people for the wrong reasons and people will end up worse off.
Clearly these are all risks. Problems will happen to some degree. There are things the government and the industry can do to minimise and mitigate these risks. But do these problems add up to an argument that these pension freedoms are a mistake? I believe it is not a mistake, because the move to giving people pension freedom was the only way the government could break a system in which a restrictive tax regime had been exploited by pensions firms who offered products that delivered poor value. And importantly since the products on offer no longer provide an adequate income in retirement, something had to change.
Second: Pensions industry is too focused on itself and not on customers
The Pensions industry seems to operate with three observations about the general public
- First, people do not save enough for their retirement needs. This is largely motivated by a desire to have things now rather than be prudent and save. The implication is that people are being foolish.
- Second, that saving and investing for income are complex matters that can only be grasped by professionals, this is made harder to understand by taxation complications. In addition products are generally complex and difficult to understand.
- Third, everyone’s situation is different and we all need personalised advice.
Now some of this may be true in some cases. But are people really that irrational that they ignore their future needs? Are people all so different that everyone needs bespoke expensive advice? It is distinctly possible that the problem is the products are too complex and unattractive rather than customers’ foolishness.
Why is that pensions and investment products are so complex and impenetrable to the average person? I think it starts with the purpose behind pensions products. The products are designed to make money for the provider and pass on the risk to the customer. Most pensions firm products that have a cost structure that guarantees income and profit to the pension firm and leaves the customer with all of the risk. This structure and risk share is very off-putting to customers.
Third: it is time to disrupt the industry
Pensions is one of the few industries that has not been disrupted by insurgent newcomers. It is dominated by established players. Many industries are being disrupted by people creating better products that help customers. e.g.
- EasyJet offered an easier way to book airline tickets at a better cost
- Google are transforming the advertising and media businesses by making it easier to access for smaller businesses.
- Apple and Samsung have pretty much destroyed other mobile phone makers with products that do what people want (and do much that people could never imagine they wanted)
- Amazon are working their way through most retail industries with simpler easier lower cost customer service.
- Airbnb are transforming hotels and travel.
There is an opportunity for someone in pensions to provide both accumulation and decumulation products that are designed to help customers first rather than be designed first to secure an income for the asset managers and product providers and only give secondary thought to how the product helps customers. A few early thoughts are that a new better product would
- Be easy to understand
- Be managed online
- Have fair and transparent charging (including risk share)
- Be segmented to satisfy the majority of the population’s needs
- Not need independent expensive financial advisers
- Would be endorsed by the regulator
When someone does this (when not if!) the population will return to investing in pensions, ordinary people will be able to exploit the pension freedoms and be more more secure in their retirement. Whilst the current paradigm is maintained, then many will either avoid pensions, will make mistakes and will be poorer in retirement.
How to design such a product?
start by reading this article on AttractiveThinking