The Freedom and Choice in Retirement legislation is generating a lot of discussion and headlines, along with numerous recommendations and predictions about how this change will impact the retirement industry. Despite all the talk, many people in the industry are missing an important factor that may actually help them.
Most people seem to be focusing on three aspects of the impending legislation:
- What will retirement products look like in the new world after April 2015?
- Is this the death of the annuity?
- And how will the financially uninformed be advised on the choices that now face them?
Much of the conversation has focused on what the new products will look like and who pays for advice to the individual regarding which product is right for them. Here’s what isn’t happening so far: a comprehensive discussion about how existing pension products will benefit from the freedoms allowed by the new legislation.
A harsh reality of the retirement market in the UK is that it is ruled by customer inertia. At the wealthier end of the market there is certainly active engagement in financial choices, but among the middle market (where the vast majority of individuals reside), there is very little engagement. One look at the ABI figures on engagement in annuity choice at retirement is proof of this point.
Whether that inertia is driven by fear of uncertainty, distrust of the financial markets, an expectation of unreasonable fees or simple laziness because retirement is at least five years away, is irrelevant. It is reasonable to assume that most of the future retirees in the UK will do nothing to move their pension policy into a more appropriate vehicle.
So, the question is: if the vast majority of the UK retirement customer base is unlikely to engage actively with these changes, how do we encourage a more dynamic interaction between the retiree and their products?
Our suggestion is a simple one: there has been some talk about introducing an ‘automatic decumulation’ option, where a customer is automatically moved into a new retirement account that will support all of the new options. We think the answer is simpler: enhance the legacy products (the section 226s, personal pensions and FSAVCs) that most pension investors have today to support these new retirement options.
All that this requires is an enhancement of the terms and conditions (T&Cs) of most products, and an IT and operational model that will support it. These products should include Uncrystallised Funds Pension Lump Sum (UFPLS), partial UFPLS and Flexible Access Drawdown options. It doesn’t have to be complicated. Sapiens can offer a policy administration solution that supports the full range of freedom and choice options on legacy retirement products, including flexible drawdown and traditional annuities.
Rather than dwelling on the potential negatives of the impending Freedom and Choice in Retirement legislation, insurers would be wise to begin planning how this change might benefit their retirement business.