Pensions freedoms reducing consumer choice and creating 'capital-lite' model says report

The Pensions Institute report into the reforms (46 page / 258KB PDF) said the retirement savings industry was struggling to adapt to regulatory and technological change. It said the impact of regulation on life companies had been to reduce consumer choice, with fewer products available.

The report said providers seeking to retain a risk-based model were under increasing regulatory pressure and this had encouraged the adoption of an asset management ‘capital-lite’ model. The European Solvency II directive had also contributed to this adoption. The report noted this shift limited choice as fewer insurers operated in this area.

The institute warned almost half of the UK working population remains without cover from auto-enrolment and there was a danger of auto-enrolment losing momentum if contribution hikes due in 2018 encouraged higher opt-out rates.

Although the institute noted technology was an essential component of the retirement market, it said quality varied significantly. The report added there was limited evidence of innovation and there was a need for universal adoption of standards across the retirement industry.

Many contributors to the report said UK regulation had moved “against the spirit of pension saving”, and that pensions freedoms were introduced without the infrastructure to provide proper consumer choice or protection.

Pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, said it was still “early days” for the retirement choice market.

“Defined benefit (DB) schemes and DB pensions still play a major role in many current retirees' plans,” Barton said. “Auto-enrolment schemes are not yet mature and pot sizes for retirees will often be relatively small. This has an impact on consumer demand and consequent product development.

“As clearer consumer demand emerges for specific types of needs and wants, we expect retirement products will emerge that satisfy those needs and wants. We’ll get there, but these things take time.  Providers were, after all, given only a limited amount of notice of freedom and choice and investment in developing a new suite of products takes time and money,” Barton said.

He said pensions freedoms had made financial planning more challenging for savers as the potential outcomes of retirement saving were broader than before. Barton said tax and regulatory changes also made life harder for individuals when planning how much to save and how to eventually use their pensions pots.

“There are arguments that freedom and choice energised pension saving, because savers like feeling in control of their savings. Quite whether the wider legislative, regulatory and tax regime encourages saving is very much open to question. The difficulty of saving compared with the ease of borrowing is certainly an interesting phenomenon,” Barton said.

“Regulation can help to promote saving but it may be innovation in the savings space that will really make the difference. The trick is to make saving as easy and, potentially, as rewarding a personal experience as spending,” Barton said.

The reforms to the UK pensions landscape came into force in April 2015, giving members of defined contribution schemes more freedom to access their savings when they turn 55. The House of Commons Work & Pensions Committee recently began an inquiry into the success and effectiveness of the 2015 reforms. The committee is looking particularly at how people are accessing pensions and whether they are taking adequate advice.

Meanwhile the UK's state-backed pensions scheme, the National Employment Savings Trust, asked for limits to be put on pensions freedoms to protect its members from losing retirement savings when it responded to the Financial Conduct Authority's retirement outcomes review.