The Pros and Cons of Pension Freedoms

Ever since the then Chancellor, George Osborne, announced his plans for pension freedoms in his 2014 Budget there has been an on-going debate about whether this was a much needed and welcome reform or, at the other extreme, a series of steps too far and a disaster in the making.

On the plus side the escape route from the “tyranny of annuitisation” has proved popular with the public. The initial “dash for cash”, which many feared would persist, seems to have abated and on the whole most savers appear to be acting responsibly and managing their money reasonably well. Supporters continue to argue that the right for consumers to decide for themselves how to spend their own money is a fundamental principle underpinning the policy and has to be maintained.

The other side of the argument relates to the laissez-faire nature of the freedoms. Critics point to the diametrically opposed possibilities of individuals either spending their money at a rate of knots that will leave them impoverished in old age, or alternatively being “recklessly conservative” and selling themselves short in their day-to-day living expenses. Questions remain about the role of advice and guidance in the process and whether a boost in take-up of either or both could be achieved by various means including the use of free advice vouchers, or even compulsorily. The National Employment Savings Trust (NEST) has gone so far as to say in its evidence to the recent Select Committee hearings that in its view advice and guidance alone will never meet the needs of the millions of savers approaching retirement and strong default decumulation options are needed on top.

Running alongside all this is the impact on private sector DB schemes, which have seen requests from members for transfers to DC arrangements increase substantially over time. This has been occasioned not just by the freedoms but by the sudden and very substantial growth in transfer values which may not last much longer but have certainly encouraged many to want to take advantage of the “too good to miss” offers now on the table. Although comparisons have been made with the late-80s personal pension misselling scandal it is alleged these are essentially different and often provide a win-win situation for both members and corporate sponsors. Not everyone, of course, would subscribe to that view.

I have to say ever since the freedoms were announced I have tended to blow hot and cold about them. First reaction was largely favourable, mainly because of the very poor value being offered by annuities and the need to find ways of offering savers much better returns on their savings. Subsequently I have begun to worry about the long term effects of such a radical policy switch and the potential serious consequences of people being wrongly encouraged to leave the security of a high quality DB scheme, of over-paying tax or of being scammed.

There is clearly a need to continue to look hard at the delivery of pension freedoms and make sure consumer protection is as good as it can be in the circumstances. We also cannot rule out the possibility of another misselling scandal eventually coming to light in relation to DB transfers and take whatever corrective action is needed in consequence of that.  

But that said, we are where we are and I don’t see any likelihood of cancelling pension freedom and going back to square one. Pension freedom as a concept is now part of our collective pensions DNA and is here to stay. The repercussions and how all this will impact on the wider pensions landscape in the years ahead remains to be seen.

This blog was first published on the Professional Pensions website.