This guest blog was contributed by Laurence Baxter, Head of Policy and Research at the Chartered Insurance Institute (CII)
Having looked at the next generation of pensioners in the first roundtable entitled Is it too late to save, the Age UK Financial Services Commission then turned its attention on 6 February to the early to middle years of retirement. Hosted by Mercer, leaders from across the financial services industry debated a number of hot topics which are summarised below.
Managing early retirement while considering the longer term
Individuals in the first decade of retirement face the potential for economic, lifestyle and health shocks, underlying the importance of financial resilience for this group. One complexity was the different types of pension pots people have as a result of multiple employers. There is the transition from Defined Benefit to Defined Contribution, so some of pension pots will be final salary schemes while others are money-purchase. Changing patterns of retirement from a single watershed event to more of a process will also be significant.
While early retirement is not without its bends in the road, people in this group still need to be mindful of issues that could arise later in life such as long-term care and how or whether they use home equity.
The decumulation process and annuities
What should be foremost on peoples’ minds when they approach retirement is the whole decumulation process including taking stock of pension savings and purchasing an annuity. This area is already under scrutiny with the Financial Services Consumer Panel research that was published before Christmas and the FCA Thematic Review whose results are expected later in February.
There was a consensus around the table that the annuities market was in need of change. Products and options have become immensely complex, not helped by potentially damaging distribution practices resulting in some consumers staying with their existing provider out of inertia, while others get enticed by firms offering “straight through” services leading to an unadvised annuity purchase.
The group took the view that the best solution to this problem was some sort of “auto-enrolment” into annuity interaction. All consumers approaching retirement should be directed to an independent and trusted decumulation expert to talk through their options prior to making a decision. The “interaction” could be “advice” or “money guidance”, and the timeliness needs to be determined by trigger points such as the receipt of the final statement of state pensions benefits from the DWP on retirement. The trusted source could be TPAS, MAS or Which? but there are obvious capacity issues that would need addressing.
Information and advice
Given these capacity issues, it was clear that the regulated professional advice market must play a part. However, while the quality of the advisory market has improved as a result of the Retail Distribution Review, some sort of mass market solution is needed.
One solution that emerged in the roundtable was giving fully qualified advisers an ability to use a “streamlined” advice route around specific situations. The analogy was drawn from the medical profession whereby doctors can opt for a 6-minute consultation versus 2hr+ investigation. What if there were a way to offer a clearly labelled service that differentiates from the broader services, allowing the client to receive a short, targeted advice on specific issues? The better qualified the professional, the more adept they would be at handling the shorter consultation.
Supplementing income: home equity
The discussion then turned to helping homeowners supplement their retirement savings with income and/or a lump-sum released from their home equity. We discussed the existence of the small private lifetime mortgages and home reversions markets, however there is still uncertainty about its viability given its small size and specific purpose.
While the growth potential versus public safety of this private equity release market has been debated for nearly a decade now, this has been reinvigorated by the whole issue of using home equity to pay for care. The debate is now whether the private market could be used to plug the gap left by the Universal Deferred Payment Scheme eligibility limitations.
There are still obvious issues with equity release. Both advisers and providers are split on whether the market is viable and safe enough. For example those providers who do not offer a product are still sizing up the prudential requirements as well as reputational baggage from the old Home Income Plan market. Advisers and consumer groups need to weigh up the pros and cons of the various options, for example acknowledging that downsizing might not always be the best option for a consumer under the duress of needing immediate care.
Clearly a fundamental revision in the regulatory approach for this market is needed. The current approach is designed for a very different market. The Government has already demonstrated in interest in home equity for retirees as well as first-time buyers. Perhaps it needs to take another look at the balance of incentives, both regulatory and otherwise.
Dr Alexander Scott, Chief Executive of the CII, is jointly chairing the Commission roundtables with Age UK’s Chief Executive Tom Wright.