Written evidence from Hargreaves Lansdown (PFC0080)

Key evidence and recommendations

• The failure of the Financial Advice Market Review to address the advice gap is denying investors access to guidance which would be helpful to them
• There are very significant concerns about the annuity market – unique new consumer research
• The FCA’s Statutory Objectives are no longer aligned with the needs of investors
• It is possible to engage investors in good decision-making however generally the pensions industry has not done it well
• Early 50s is a critical intervention point – it is the peak anxiety point for worrying about retirement
• Lack of trust and lack of engagement are critical issues to be addressed
• Auto-enrolment members should be given the right to select the pension arrangement into which their employer pays their pension contributions

The following submission is made to the Committee on behalf of Hargreaves Lansdown.

What are people doing with their pension pots and are those decisions consistent with their objectives? Is there adequate monitoring of the decisions being made?

1. Investors are withdrawing cash because they don’t trust or understand pensions. 52% of those who took money out did so not for expenditure purposes but to reinvest it in some other financial arrangement such as a bank account. This should be a major cause for concern.

2. 9% of investors with a pension pot of £50,000 to £99,000 with a GAR are cashing in their pension pot in one go. This means they are almost bound to be paying higher rate tax on their pensions, quite possibly unnecessarily.

3. Significant proportions of those taking drawdown income are withdrawing in excess of 4% a year income. As the analysis by Hargreaves Lansdown shows below, they are quite likely to run out of money before they die.

4. We strongly believe investors should be helped and encouraged to engage with their retirement savings as early as possible before they come to draw on those savings. There is a strong argument for developing the mid-life MOT as part of a broader engagement strategy.

5. The annuity market collapse

6. Hargreaves Lansdown has conducted new consumer research into the annuity market and investors’ attitudes. This research shows:

• When asked the question ‘Do you envisage ever buying an annuity’, 56.9% said No
• When asked what rate of return would be required to purchase an annuity, 50.2% said ‘More than 8%’ (current standard rate annuities at age 65 pay 5.22% for a level annuity and 3.2% for an inflation linked annuity).
• At today’s annuity rates, an investor would have to be 78 to qualify for an annuity rate of 8%
• Alternatively, for an 8% annuity, a 65 year old would have to smoke 30 a day and drink 30 units of alcohol a week
• Just 7.7% say they would buy an annuity paying 5% income or less.’
• When asked why they wouldn’t buy an annuity, 67.9% said it was because they ‘want control of their money in retirement.’

(Survey of 1001 55-64 year olds with a Defined Contribution pension. Survey conducted 18-24 October 2017)

Are people taking proportionate advice and guidance and if not, why not? Are people adjusting behaviour in response to advice and guidance?

7. Investors do seek guidance and in many cases they need that guidance however it is not generally from the Pension Wise service. They should be able to get more and better guidance from their pension provider.

To what extent will pensions dashboards enable consumers to make more informed decisions about their retirement savings? What are the remaining obstacles to their creation and success and how should those obstacles be overcome?

8. Consolidation and visibility of pension pots will assist investors in taking a holistic view of their retirement provision, however it is important not to look on the dashboard as a universal panacea for all the retirement decision-making challenges.

9. There is no substitute for promoting and encouraging personal engagement. This engagement should also seek to foster a positive culture of saving and investing.

Is Pension Wise working? If not, how should it be reformed? Are there any implications for the proposed creation of a new single public financial guidance body?

10. The provision of guidance is popular, however take up of the Pension Wise service has been disappointing, with only around 10% of those accessing their pension choosing to make an appointment with the service.

11. We do not support making pension wise mandatory, something which we believe would cause widespread anger and dissatisfaction with the pension system. The nudge towards pension wise could be made more robust however we think the principal priority should be to find ways for the pensions industry to better personalise the guidance it gives to its customers.

12. Income withdrawal issues

13. Whilst there is some guidance available to investors on what to do with their investments, there is very little help currently available on what a good income withdrawal strategy looks like.

14. Rather than ‘nibbling away’ at their capital, we believe investors should be encouraged to draw only the natural yield on their retirement fund. Over time this strategy is likely to preserve their capital and to provide them with a rising income.

Capital Nibbling Vs Natural Yield

15. Source: Hargreaves Lansdown, LIPPER, based on a £100,000 pension pot, income commencing 1st January 2000, FTSE All Share – no charges.

16. Pension pot size over time when funding retirement income by selling investments – what we call capital nibbling.

17. By contrast, a strategy of drawing the ‘natural yield’ on investments is likely to be more sustainable as it involves simply drawing the dividends and interest from the underlying investments and preserves the capital.

18. The following chart illustrates the pattern of income payments from an investment in the FTSE All Share since the year 2000.

Fluctuating income from FTSE All Share

Are there persistent gaps in the advice and guidance market and what might fill them? Is automated advice and guidance filling gaps as expected?

19. A financial system that is failing investors

20. Automated advice and guidance will play a limited role in filling the advice gap. Firms will develop technology to facilitate better customer outcomes, however this will not answer the needs of the majority of the population.

21. There are persistent gaps in the advice and guidance market. There is a widespread perception the Financial Advice Market Review has failed to fill the advice gap. Firms are unable to do the thing which would benefit customers most; they need to be given more latitude to personalise their customer communications, to make them relevant and help customers seek out and decide upon the solutions which will serve them best. This is not currently possible within the Advice/Guidance boundaries which have been set by the FCA in accordance with MiFID.

22. Individuals face myriad variables, which demand unique solutions tailored to their personal circumstances.
23. The timing and manner in which individuals access their pension savings will depend on:

• The total value and type of their private pension savings
• Their state pension entitlement
• Their non-pension savings
• Their health
• Their property ownership circumstances and the amount of equity available
• Their financial literacy
• Their attitude to investing and market risk
• Any prospective inheritance they might enjoy in the future
• The needs of their children
• Their health in the future
• Government policy in relation to the provision of care
• Their spouse’s pensions, savings, and health
• Any post retirement earnings

24. Investors need information and guidance which can be tailored to their personal circumstances.

25. The FCA’s statutory objectives, which can be traced back to the creation of the FSA in the FSMA 2000 are no longer aligned with the needs of investors in 2017. Even with the more recent addition of the competition objective, there is no part of the FCA’s remit which fosters saving and investing or even recognises the desirability of consumer interaction with the financial services industry.
26. From the FCA’s perspective, a competitive market which had integrity and which protected consumers but which also lacked any customers would still be a good system.
27. This needs to change, starting with the FCA’s statutory objectives and working with government and industry to promote effective interaction between the population and the financial services industry which serves it. This could include:

• The active promotion of the benefits of asset-backed investment for long term savings
• Fostering a national culture of saving and investing
• The DWP setting engagement targets
• A Guidance regime which accommodates firms giving personalised guidance which is relevant to individuals’ circumstances without it being deemed as advice.

28. Investor engagement

29. The pensions industry has historically been very poor at engaging with customers. It is possible to achieve very high levels of engagement however providers have never been highly motivated to do so; the money trickles into them and then generally stays with them. This doesn’t mean it can’t be done though.

30. Across our book of workplace pension scheme members (around 85,000 members from all walks of life), around 60% have actively chosen to register for online access to their accounts and of these, around 30% log in every month.

31. In the run-up to accessing their pensions, over 50% of drawdown investors log into their Hargreaves Lansdown accounts in the final 6 months and they do so an average of 5 times a month.

32. Telephone help-lines are clearly an important resource for investors, with around 90% calling us to discuss their arrangements and doing so an average of 3 to 4 times in the 6 months before accessing their pensions.

33. The use of printed guides is also widely used, with around 40% of investors requesting a copy of a guide to their retirement options in the 6 months before retirement.

34. Investors hit ‘peak anxiety’ about their retirement in their early 50s: when asked about their main financial worry, those reporting ‘retirement’ peaked between the ages of 50 and 55. The following slides are based on investor research conducted by Hargreaves Lansdown, surveying over 1,000 pension investors across a range of ages.

35. There is an intriguing drop in their financial confidence at around the same age; whilst they consistently underestimate their financial capabilities, in the run up to retirement, the gap between their actual and their perceived financial capability widens significantly.

36. This same trend emerged when we asked them about their understanding of financial matters and their self-reported ability to choose between financial products. Whilst there is a general trend towards greater confidence through life (as might be expected), in their 50s investors become less confident about their ability to evaluate financial choices.

37. As might be expected, investors’ confidence in their ability to make informed choices declines above the age of 80. Intriguingly, research elsewhere into cognitive abilities shows that whilst fluid intelligence declines from a relative early age, the ability to apply learned knowledge, what might be called wisdom, continues to improve with age. The crossover point of peak intellectual ability typically occurs in individuals’ early 50s. This should therefore be the age at which they are most capable of making financial judgements.

38. We persistently warn investors of potential losses and of the hazards of investing in the stock-market, yet over the long term, say a 20 year period, the chances of cash outperforming equities is around 99%. Yet it is quite reasonable to expect an investor to run a drawdown strategy for 20 years or more.

39. When we talk to investors about risk, for younger savers this word evokes ‘Thrill, Opportunity, Adventure’ however for those approaching and in retirement, the same word represents ‘Uncertainty, Loss and Danger’. This suggests we should be more sensitive to the impact risk warnings can have on investors.

Is there evidence of product market competition resulting in cheaper, clearer or a wider products for consumers? Are people switching from their pension provider in accessing their pots? Is an adequate annuity market being sustained?

40. Product choice

41. Contrary to the expectations of policymakers and regulators, rather than the pension freedoms provoking a Cambrian explosion like proliferation of new retirement products, it has instead been more a of mass extinction. The number of annuity providers has halved in the two years since pension freedom and there are widespread expectations more companies may pull out of the market.
42. The limited number of guaranteed annuity providers have all pulled out of the market.
43. In drawdown, no provider has yet been able to bring to market a robust, safe risk-free asset-backed drawdown arrangement which would allow disengaged investors to be defaulted into an efficient retirement.
44. This should not be a surprise; there is no alchemy available to create gold from lead. Providing guarantees is expensive at the best of times and in a low-interest rate environment it is extremely challenging. Investors are either exposed to market risk or they are not. Any half-way solution involving a quasi-guarantee ends up being complicated and opaque. This tends to make it both expensive and more prone to misunderstanding regarding the nature of the guarantees, which in turn increases both the costs of distribution and the risk of consumer disappointment if it fails to perform as expected.
45. This means investors have the choice of either an (expensive) annuity or a (risky) drawdown or a combination of the two.

46. Switching

47. For years the pensions industry strove in vain to persuade investors to shop around for the best possible annuity on the open market. This was a relatively straightforward proposition with an easily demonstrable benefit in the form of a higher guaranteed income, yet it was never possible to get more than around 40% of retiring investors to buy their income from a different pension provider. There are a number of well-documented behavioural biases at work, including loss-aversion, satisficing, familiarity-bias, all of which conspire to drive investors to take up the proposition in front of them rather than to look elsewhere.
48. This is reflected in the fact 94% of non-advised drawdown investors choose to take their money from their existing provider.

49. The picture is more complex than this though. Around 40% of Hargreaves Lansdown’s drawdown investors transferred across to us within 4 years of commencing drawdown. At the point of drawdown they would have counted towards the 94% statistic (above) however in the period immediately prior to starting drawdown they had shopped around and made an active decision to move their money to us.

50. In addition, we have seen data from Equifax which shows increasing numbers of people switching drawdown provider after retirement, with nearly £1 billion of switching taking place in Q2 2017.

Are the Government and Financial Conduct Authority taking adequate steps to prevent scamming and mis-selling?

51. The current strategy on fraud prevention is doomed to fail. It relies on selling a negative rather than a positive. The Scamsmart and the Scorpion campaigns are designed to alert investors to the risk of fraud and educate them to spot and avoid scams. This is the wrong way round.
52. Huge resources are devoted to regulating legitimate firms and advisers. They are required to adhere to high standards, which the vast majority of them do, at considerable additional cost. In the rare event that firms or advisers fail in their duty of care to their customers, well-funded and comprehensive compensation schemes pick up the pieces.

53. The government and the FCA should put their money where their mouth is and back the regulatory system they have created. The message to investors from all quarters should be to only deal with regulated firms and advisers; in the event that an investor chooses not to do so, they will no longer enjoy the protection of the regulatory system.

54. Such an approach would help to rebuild the trust in the system which is currently absent.

Are the freedom and choice reforms part of a coherent retirement saving strategy? To what extent is it complimentary to or undermined by other policies?

55. There is a significant lack of coherence about current government and regulatory policy in regard to pension freedoms. There has been a singular failure to join the dots between the defaulting of savers into auto-enrolment schemes at the front end of pension saving, and the overwhelming necessity to engage them with their retirement choices as they approach retirement at the back end.

October 2017