BLOG: The cost of pension freedom
Ian Stott of The Consulting Consortium considers the cost of pension reform – and who will pay it.
The changes to the pension tax rules announced at the 2014 Budget in March will completely reform both pension savings and retirement products, not least in the way that new products and services will need to be regulated to protect consumers. The intentions behind the changes should be applauded: more freedom, flexibility and control over how defined contribution pension assets are accessed. This new framework, that effectively removes the previous draconian restrictions, was positively received by most in the pensions industry, but what is the reality for consumers?
Change brings both opportunity and uncertainty and there will always be the potential for misinterpretation or abuse. It’s clear that the industry has to embrace a new pension landscape as well as the associated regulatory challenges. Increases in the regulatory burden to ensure protection for consumers often comes hand in hand with an increase in costs for firms. If these costs are passed on to the consumer, as they have been in the past, it will outweigh any cost savings associated with product innovation.
The Pensions Bill 2014, which received Royal Assent in May, brought an even wider choice for consumers through the introduction of defined ambition pensions; in essence, a half way house between defined contribution personal pensions and defined benefit occupational schemes. The three mutually exclusive saving schemes each differ in the type of “pension promise” they offer to individuals and as such the level of risk for the consumer.
A key challenge for the industry will be re-educating consumers on the new options and choices available in an often disengaged and largely ill-informed marketplace. Providers will be expected to take on some of this task through the introduction of the ‘guidance guarantee’, where consumers can simply buy a pension or retirement product without professional advice. However, there will also need to be a wider education programme to ensure that the whole market is engaged in some way. While this ‘guidance guarantee’ will be marketed as ‘free’ there will be a financial burden on the provider which will need to be paid for. The most likely outcome of this is that consumers will bear the cost.
The challenge of ensuring that consumers are appropriately informed of their options to enable them to make suitable decisions is significant. The individual cost of making an inappropriate decision about what to do with their retirement funds could be highly detrimental to a consumer and will impact the rest of their life. However, the social and fiscal cost could be even further reaching should a large proportion of pensioners choose an unsuitable option and end up relying on the state.
Ian Stott is client services director at The Consulting Consortium.