The Financial Conduct Authority (FCA) recently published the interim findings of the Retirement Outcomes Review looking at how the retirement income market is evolving since the introduction of pension freedoms. Beyond the statistics, two aspects of the FCA approach caught my attention.
The first is the absence of much international comparison. In the footnotes, the FCA cites conversations with regulators in Australia, US, New Zealand, Denmark and Ireland. But only Australia is mentioned in the body of work, with positive noises made about the proposal in Australia that pension schemes ('supers') default members at retirement into hybrid products which combine income drawdown and deferred annuities. At this stage, though, it is just a proposal. Nowhere across the world is there an example of people choosing freely to buy products at retirement which contain guarantees. Perhaps this is why the fruits of the FCA's discussions with these national regulators go undiscussed.
There are no simple lessons to be learned from the US, New Zealand, and Ireland regarding good decumulation practice.
There are no simple lessons to be learned from the US, New Zealand, and Ireland regarding good decumulation practice, while in Denmark the lesson is that annuitisation works. Ireland's drawdown market is characterised by stiff charges and limited shopping around. NZ has an excellently performing system overall but this is largely because of its extremely generous universal state pension pegged at 2/3 of average earnings – imagine if UK first pillar offered a £18k pension per year to everyone! Decumulation in NZ is characterised by taking one's pension as cash to buy a property. In the US the fiduciary rule signed by Obama but now under threat from President Trump is an attempt to reduce the conflicts of interest which exist in the US retirement market. Unlike in the UK, financial advisers do not have a duty to place the client’s interest first.
The evidence suggests that given the chance to choose freely, people do not lock up their money in a pension.
The FCA also argues that the sheer number of people cashing in their pensions reflects "mistrust" of pensions (as well as the trivial size of many of the pots and an understandable inability to discount the present value of their future individual cash flows). But the rationales cited in the qualitative and quantitative surveys - "I've never believed in pensions" "it will disappear if I don't cash it in", "I wanted to control it myself", lend themselves equally to a conclusion that people simply dislike pensions. Dislike and mistrust are not quite the same thing after all. Mistrust assumes that the product could be popular if only trust could be restored. But looking around the world the evidence suggests that given the chance to choose freely, people do not lock up their money in a pension, whatever the sensible reasons for doing so.
This evidence is in line with a growing body of academic behavioural literature. Across the board in a series of experiments people choose individual control over devolving responsibility to someone else, even where the individual is aware that the outcome is sub-optimal. A psychological satisfaction is gained, it seems, which outweighs the financial cost.
In the pensions space all this suggests that unless forced to do so, people en masse simply won't buy retirement products containing guarantees. After all, 'take back control' as we know from Brexit, is a powerful motive force.
This article originally appeared in Money Marketing magazine on 9 August 2017.