The double-edged sword of increased flexibility

The double-edged sword of increased flexibility

While commonly viewed as positive for pension provision, the new flexibility brought in by the Budget means even more pressure on members to make the right decision.

Stephen Budge


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While commonly viewed as positive for pension provision, the new flexibility brought in by the Budget means even more pressure on members to make the right decision. And, without any form of industry benchmarks, I believe these positive changes could be in vain unless we support members at each step of their retirement saving provision.

No means of comparison

Indeed, whilst increased flexibility will give pension holders a wider range of options at retirement to choose from, I fear members will have no way in knowing how their scheme compares to others in the market and how in particular, the fund in which their savings are invested compares to other choices; such as whether it provides good value for money, return on investment or an acceptable level of volatility.

A regulator responsibility

In a time where pensions risks are virtually all born by the member—a long way away from the fully supported defined benefit arrangements—I propose that more should be done to help members understand them, and I believe that the regulator has a responsibility to ensure this.

We are in the midst of a generational shift to a demand for personalisation. More people are realising that a ‘one size fits all’ approach does not have a place in our ever-changing world, and this includes UK pensions.

Information overload

However, I feel that the government’s changes to pension regulations (namely increased flexibility) present a double-edged sword of uncertainty and confusion. The industry is now undergoing significant market change, with new investment choices, provision choices, products and delivery models. For the average person, this information is simply overwhelming and there is simply no way for them to understand what’s best for them. I question whether the guidance guarantee will get close to the support needed for members.

Advisers can be unreliable

Of course, from the employer’s point of view, their scheme members can have access to advisers, but even in that scenario the scheme member is reliant on their adviser knowing the market and their best interests in order to support them in getting the best outcome. It also requires the adviser to be whole of market and not have a vested interest in a particular direction.

Impartiality and transparency

Don’t get me wrong, support from the employer is of course an essential component of any pension scheme; however, I think there needs to be a level of impartiality and transparency across pension scheme provision and feasibly, this would be most successfully provided by a government body.

For example, if you join an organisation today you will be auto-enrolled into a scheme at their default investment choice level. If the organisation creates poorly defined defaults, then the scheme holder will be invested into that poorly defined default too and this is likely to impact on their retirement outcome.

The danger of the unknown

Furthermore, because of the wide range of default options employees could now encounter, saving in a defined contribution scheme could be very different and increasingly more complex than previously.

The danger of these unknowns could result in members not knowing how good their default is; whether it is likely to meet their needs or how it compares to other options in the market.  One could suggest that these are fairly important things for a scheme member to know or at least have access to, however, the lack of information on the market suggests otherwise.

More appetite with more change

For these reasons, we need industry wide benchmarks, where scheme holders can compare their scheme to the wider market and understand whether it provides value for money. Although there have been some failed attempts to do this in the past in particular with defaults, I believe that there would be more appetite to make it a reality now because of the significant changes to the industry landscape. In order to give this the push that it needs (and make the widest impact), the Pensions Regulator would probably be best placed to take this forward rather than individual consultancies.

A common investable benchmark

Nonetheless, providing such a service will not be easy. Due to market cycles, performance can change from being good in one year to bad in the next. Similarly, you could have the best designed scheme in the world on paper offering all sorts of communication and member tools, but if there are poor investments, this can easily ruin member outcomes.  This is why there needs to be multiple ways of rating schemes, and some of the ways in which this could be done could be through peer group comparisons, and a common investable benchmark.

Accredited validation is essential

Increased flexibility to UK pensions will undoubtedly give scheme members the freedom to make more tailored decisions about their long-term savings and retirement plans. However, without any accredited validation to support member choices, pension outcomes could be severely compromised. I hope that we will see these services on offer in time for even wider scale pension flexibilities in 2015.

This article represents the views of the author only, and does not necessarily represent the views or professional advice of KPMG in the UK.

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