Regulator fears pension freedom mis-selling
There was always a remarkable haziness about what the pension freedom reforms announced in Budget 2014 were meant to achieve.
While most government pension initiatives are designed at improving incomes in retirement or making savings more secure, George Osborne’s revolution offered freedom and choice for its own sake. There was seemingly little regard for the consequences.
Some organisations, such as the TUC, noted that the market on its own has repeatedly failed to deliver a fair deal for savers. We pointed to the mis-selling scandals of the past. MPs and some pensions industry figures echoed this.
Now, less than a year after the changes came into force, the financial regulator is getting worried.
“The Financial Conduct Authority has identified reforms to the pensions market as a possible trigger for future mis-selling”, says a report issued this week by the National Audit Office.
In short, the Chancellor’s flagship pensions reform, until his next one, threatens to undermine recent efforts to persuade savers that pensions are a secure home for their money.
The new freedoms give people aged 55 and over greater choice on how they use their defined contribution pension pots. Previously, most people were effectively obliged to buy annuity contracts giving them an income for the rest of their lives.
That the system required reform is undisputed. Too many purchasers of annuities got a poor deal in part because complexity and inertia meant that most trusted their existing pension provider to supply them with a good deal rather than shopping around.
But the financial services industry has failed to develop much to fill the annuity’s place aside from hastily repurposed, and often expensive, drawdown products previously sold only to the very wealthy. These leave pensioners with the very real risk of eventually running out of money.
Many have simply cashed in their savings instead, and decided to spruce up their homes.
The NAO, in a report on mis-selling in financial services, notes: “Financial services firms could take advantage of customer inexperience to sell inappropriate products.” This will do nothing to encourage long-term savings in a country where financial scandals are still fresh in the mind.
The FCA expects to launch a review of retirement outcomes by June 2016, the NAO says. It cannot come soon enough.
One glimmer of hope could come from government-backed NEST. The body has developed a reputation for solidly-researched innovation and last year released a promising initial broad blueprint discussing what retirement income products could look like. If it builds on this, it could provide a model that others follow.