Things are not quite as exciting as many people originally thought they might be in April 2015, but there is good reason for this. Using Solvency II and the Retail Distribution Review (RDR) as recent examples of big changes in financial services, the industry has generally had a decent period of time to prepare for these events.
This has not been the case with pension freedom. With an average gestation period of 12 to 18 months for the development, testing and launch of new products, it was unlikely that we would see a raft of new products launching in April 2015 as a result of the bombshell delivered in the March 2014 Budget.
Market stakeholders have been desperately trying to ascertain consumer behaviour and requirements in light of the changes. Market research exercises have therefore been prevalent with both consumers and financial advisers in order to support proposition development, and these exercises will continue as providers seek to monitor behaviour now that the changes have been introduced.
Slow adaptation
Interestingly, when speaking to financial advisers there has been an acknowledgement that the existing range of retirement income product solutions available in the market is generally sufficient, and hence product evolution rather than revolution might be the order of the day.
Finally, there is an underlying nervousness and uncertainty about what cards might be dealt by the outcome of the general election.
Let’s take a look at how some of the market stakeholders have been responding to the changes in the short term, and the likely direction of travel for the market over the longer term.
FCA
The regulator published two important papers in the first quarter of 2015.
PS15/4 – Retirement reforms and the guidance guarantee: retirement risk warnings, February 2015
MS14/3.3 – Retirement income market study: Final report – confirmed findings and remedies, March 2015
PS15/4 was dubbed ‘the second line of defence’, and these new FCA rules have been designed to help protect consumers wanting to access their pension savings from 6 April 2015 by requiring firms involved in the sale of retirement income products to give additional risk warnings tailored to the consumer. The new rules were introduced without consultation.
MS14/3.3 started out originally as a review of working practice, competition and consumer outcomes in the annuity market, but morphed into a review of the wider retirement income market, and subsequently had to take into account the pension freedom changes. After a consultation process, the FCA has confirmed the following proposed remedies:
Remedy one: requiring firms to provide annuity quotation comparisons so that once a consumer has decided to buy an annuity they can easily identify if they could be getting a better deal by shopping around and switching provider.
Remedy two: recommendations to improve the way information is framed to consumers to help them make decisions surrounding their retirement income.
Remedy three: redesigning and behaviourally trialling the information that consumers receive from their providers in the run-up to retirement.
Remedy four: in the longer term, the creation of a pensions dashboard that will allow the consumer to see all their pensions in one place.
Monitoring by the FCA to track market developments and consumer behavior and outcomes, as well as the take-up by consumers of the Pension Wise service.
