Monday 16th June 2014; M&G, Governor’s House, Laurence Pountney Hill, London, EC4R 0HH; 13:30 (for a 14:00 start) – 16:00

Speaking in the 2014 Budget, the Chancellor of the Exchequer, George Osborne MP announced plans to “legislate to remove all remaining tax restrictions on how pensioners have access to their pension pots”. He said that “Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits”.

The economic environment, combined with the reforms to the retirement income market, will significantly impact consumer behaviour at the point of retirement. On the one hand, in the prevailing low interest rate environment, consumers will be more susceptible to taking large risks by searching for higher yielding investments.

Alternatively it may be the case that the reforms will allow individuals to better adapt to current and anticipated economic circumstances but this will clearly require skilled financial advice. Where does this come from and who pays for it?

In the Chancellor’s Budget Statement he stated plans to “introduce a new guarantee, enforced by law, that everyone who retires on these defined contribution pensions will be offered free, impartial, face-to-face advice on how to get the most from the choices they will now have.” Since the Budget, “advice” has become “guidance”, but the commitment to a better informed consumer remains.

Over the next year, ILC-UK plan to undertake a range of activities to explore the impact of the changes announced by the Chancellor. Through research and a series of events, we will explore the risks inherent in the announcement made and highlight the opportunities. We will explore and model potential future scenarios and look to seek solutions which mitigate risks to the consumer whilst maximising the opportunities.

ILC-UK began our work in this area by launching, with the support of Prudential, a discussion paper, Freedom and choice in pensions: risks and opportunities, which outlined the Government’s proposals to reform the market and highlight the types of choices that people will face and the support that might be available. Our analysis considered the possible implications of the reforms by looking at the take up of different products across different countries (including US, Denmark and Australia). We also incorporated a discussion of the vast array of literature on the so called “annuities puzzle” – the puzzle of why people fail to annuitise even if it represents the best option.

Our paper considered how people currently use the lump sum option in the UK and how this differs by socioeconomic characteristics. Such analysis of how people use the lump sum could act as a rough proxy for how they will react under the proposed reforms, though the reality may prove different. Our paper also highlighted how we think people could react in the face of the new reforms and make some recommendations about what policy measures need to be developed to address the downside risks.

At this event, chaired by Josephine Cumbo (FT), Ben Franklin (ILC-UK Research Fellow), summarised the planned reforms and set out the findings of our discussion paper. Dean Mirfin (Key Retirement Solutions), Tim Fassam (Prudential), Andew Tully (MGM Advantage) and Tom Boardman (NEST) gave short perspectives on challenges and opportunities. Following a discussion,  Jane Vass (Age UK) and Michelle Cracknell (TPAS) concluded the event with their perspective on the debate.

The debate provided an opportunity to discuss industry and consumer responses to the HM Treasury consultation on freedom and choice in pensions.

During the debate, the critical questions we wanted to address were:

  • How might the Government’s reforms impact peoples’ behaviours at the point of retirement?
  • What sorts of risks and opportunities for consumers will this present?
  • What might this mean for the retirement income market?

Continue the discussion on Twitter - #risksandopportunities

The presentation slides from the event can be viewed below: