11 June 2014 Freedom and Choice in Pensions Consultation Pensions and Savings Team HM Treasury 1 Horse Guards Road London SW1A 2HQ Submitted by e-mail to: Pensions.Consultation2014@hmtreasury.gsi.gov.uk Dear Sirs, HM Treasury consultation Freedom and choice in pensions BlackRock is pleased to have the opportunity to respond to the consultation on Freedom and Choice in Pensions. BlackRock is a premier provider of asset management, risk management, and advisory services to institutional, intermediary, and individual clients worldwide. As of 31 March 2014, the assets BlackRock manages on behalf of its clients totalled 2.64 trillion across equity, fixed income, cash management, alternative investment and multi-investment and advisory strategies including the ishares exchange traded funds. BlackRock has a pan-european client base serviced from 22 offices across the continent. Public and private sector pension plans, insurance companies, third-party distributors and mutual funds, endowments, foundations, charities, corporations, official institutions, banks and individuals invest with BlackRock. BlackRock represents the interests of its clients by acting in every case as their agent. It is from this perspective that we engage on all matters of public policy. BlackRock supports policy changes and regulatory reform globally where it increases transparency, protects investors, facilitates responsible growth of capital markets and, based on thorough cost-benefit analysis, preserves consumer choice. Key messages We welcome HM Treasury s consultation, which represents a major milestone in establishing an effective savings and investment policy in the UK by giving people greater control over their savings at retirement, supported by appropriate guidance. This builds on automatic enrolment, a laudable initiative which came about with crossparty support and which has introduced millions of people to long-term saving. We support the Government s contention that individuals are best placed to make decisions over their own circumstances including the control of their income in retirement. Providing freedom and choice in the way that retirement income can be taken is a logical further step in UK Pensions Reform. We believe the key success factors include: balancing the new flexibility and choice with simplicity to ensure savers do not have to navigate the current system of diverse scheme types with differing rules and practices, investment in technology by providers to be able to provide cost effective solutions in terms of product, guidance and on-going servicing, 1
a commitment from the Government to underpin these reforms with a simplified and stable policy regime for the future which facilitates this investment and allows the development of scalable solutions, and a common tax regime across pension products which supports investors flexibility on the choice of retirement solution and which has cross-party support to avoid disruptive change in the future. We also believe that the 10-year gap between private pensions and state pensions should be retained, as this will allow a phased approach to retirement, which growing numbers of savers seek. Future retirement solutions We believe the changes will bring about a more innovative market for retirement income. Providers will need to retool existing accumulation products and design new decumulation products offering income drawdown solutions to sit alongside existing annuity options. Future defined contribution (DC) solutions must be designed to: meet a wider range of consumer needs such as providing predictable retirement income with various draw down options, keep generating returns as savings deplete over time, be easily understood and transparent, and provide online guidance throughout retirement (covering topics such as longevity, living costs, investment). We also underline the continued importance of offering default solutions designed to meet the needs of the majority of savers in both the accumulation and decumulation phases. Fee cap We note that these proposals sit in the wider context of the forthcoming charges cap on DC pensions. It is important to emphasize that the charges cap should remain limited to the provision of default solutions and would also welcome clarification that the cap will not apply to in-retirement products. This would avoid inhibiting the development of innovative alternative solutions, which may, for example, involve the use of guarantees or access to potentially higher-yielding asset classes such as infrastructure which are more expensive to service. Effective guidance is the lynchpin of the new regime Success of the new flexibility given to individuals will depend to a large extent on the effectiveness of the guidance they receive. If UK savers are to benefit from the intended freedom and choice in how they take their retirement income, they need to be able to access guidance of sufficiently high standard to allow them to make informed choices. Impartial guidance standards should apply throughout the accumulation and decumulation process. Confidence in these standards will be key to developing trust in the new retirement framework. This requires high-quality financial guidance for all savers regardless of income and financial literacy and needs to be easily accessible as and when required. While we welcome the commitment made to provide all individuals with face-to-face guidance we emphasize the importance of ensuring that sufficient resources are allocated to providing the guidance guarantee. In the context of provider support we suggest that effective delivery requires clear and engaging digital communications supporting 2
interpersonal services (predominantly telephone-based support with some online direct communication). We believe that pensions guidance should lead to three key principal outcomes of (1) suitability for the majority of clients, (2) cost effectiveness, and (3) transparency of the guidance outcome (in particular the default option). We also believe retirement guidance is not a single event but rather an on-going activity. Providers can support this process with clear checkpoints throughout the accumulation phase particularly important events being: age 55 when benefits can be first accessed, and the date ten years prior to when the individual plans to access their retirement savings, during the decumulation phase where on-going investment choices have to be made. Impartial guidance standards which fully integrate the principles of treating customers fairly, kitemarked by an independent body, would negate the need for outsourced guidance. This would have the important benefit of providing consistent levels of guidance to savers. It could also form the basis of offering providers safe harbours by limiting potential liability for those who meet these impartial guidance standards. As the consultation acknowledges, guidance should continue to allow those who prefer advice to seek this. We welcome the forthcoming FCA consultation to review the demarcation between guidance and advice and whether there should be a middle way for more limited advice. We believe such an option could assist savers in making core decisions about their retirement especially if designed around recent technological developments. Finally we believe these standards should apply to both contract-based pension providers and trust-based pension schemes though schemes should not be disincentivised from applying higher standards if appropriate. Transfer from defined benefit (DB) to defined contribution (DC) Overall, we believe the Government should continue to allow private sector DB to DC transfers. We believe there are a number of points HM Treasury should take into account: Even where individuals have the choice and flexibility, in practice most are likely to see value and safety in sticking with their DB pensions. Individual savers need to be protected: o they need to be made aware of the value of long term guarantees in DB funds, o o providers need to ensure they deliver fair transfer values, and no transfers should take place before savers have received impartial advice or guidance. Once pensions are in payment transfers should not be allowed as this would introduce adverse selection opportunities DB investments in illiquid assets are currently relatively low and are far from a position where transfers should constrain investment strategy. Nevertheless, there would need to be provisions that could be invoked in extraordinary circumstances, such as in case of high levels of redemption from a DB fund. 3
We welcome the opportunity to address, and comment on, the issues raised by this consultation and we will continue to work with the HM Treasury on any specific issues that may assist in improving the final outcome of the proposals. Yours faithfully, Arno Kitts Managing Director arno.kitts@blackrock.com +44 207 743 2105 Paul Bucksey Managing Director paul.bucksey@blackrock.com + 44 207 743 4608 4
Responses to specific questions A.1.1. Should a statutory override be put in place to ensure that pension scheme rules do not prevent individuals from taking advantage of increased flexibility? We believe the spirit of the Government s actions is to establish a better and fairer system for all savers. In principle, therefore, we would advocate a statutory override across all contract- and trust-based defined contribution schemes as this has the overriding benefit of simplicity. Where scheme members elect to take their full pensions pot, trustees may well have concerns over their fiduciary obligations and employers over their duties of good faith. Whilst a statutory override would allay such concerns over their role, the underlying reasons for those concerns must still be addressed. Scheme members need to be made fully aware that with freedom comes the responsibility for planning for retirement. Scheme members will need the right tools and support to plan effectively for the future. We welcome the proposed industry wide work on the guidance guarantee and believe that a comprehensive and pragmatic provider solution is possible, which we address further under consultation point A2.6. A.1.2. How could the government design the new system such that it enables innovation in the retirement income market? The precondition for successful innovation is stability in policy making once the future regulatory and tax regime has been put in place. On-going uncertainty about future changes could restrict growth in new retirement solutions if it inhibits providers from investing in in the technological solutions necessary for the wide-scale delivery of new product solutions. The removal of existing limitations on how retirement income can be taken will clearly provide a range of choice across what individuals choose to do with their accumulated savings. We believe that the successful execution of the proposed policy will itself help to create a more innovative retirement income market. The dominance of annuity provision need no longer apply and a more open playing field will see a broadening in providers of retirement income and the way in which these needs are served. We believe that key to successful implementation of pensions reform is the provision of straightforward solutions which meet the retirement needs of savers by providing them with financial security clearly and transparently. We expect to see innovation in investment funds to provide solutions which meet savers retirement needs. This innovation needs to be manifested well in advance of the retirement phase with default solutions that can take the individual saver through accumulation and into decumulation. DC solutions now need to meet a wider range of consumer needs and a default focus and life-styling strategies solely geared towards annuitisation will no longer be adequate. With a proportion of scheme members likely to prefer to withdraw all their funds as cash and others set to stay invested after their official retirement age, there will need to be alternative default options. In the latter, product design and multi-asset strategies must allow savers to make their money last throughout retirement, balancing the need to keep generating returns as the savings pot depletes over time. In our view, such solutions need not be complicated and must be easily understood by employees and employers alike. The US market offers a good parallel where BlackRock offers LifePath investment funds that are designed to follow savers as they 5
switch from their accumulation phase into retirement and support the gradual drawdown of their savings. In this solution the blend of investments in each portfolio are determined by an asset allocation process that seeks to support the growth of assets during the accumulation phase and then provide stable income during decumulation based on an investor's investment time horizon and tolerance for risk. Typically, the strategic asset mix in each portfolio systematically rebalances at varying intervals and becomes more conservative (less equity exposure) overtime as investors move closer to the target date. A further area where we expect to see innovation is in the online guidance and support that a strong provider can offer. Online modelling tools now need to not only support savers to build a retirement fund, but also to have facilities to help them navigate through retirement. Education and guidance around longevity, living costs and investment can all be factored in. It is important that the policy framework encourages providers to invest on a sufficient scale to develop appropriate client solutions and support. Although we advocate that provider solutions should enable individuals to benefit from the outcomes of longer-term investment plans, we also think that individuals should not be unnecessarily restricted in their choices. In the same way that the open market option allows individuals to choose the right annuity provider for their needs, we believe that savers who wish to draw an income but stay invested should be free to move to their provider of choice. This could be determined foremost by the quality of the investment solution but also by the supporting services in the way that income is paid and on-going guidance provided. As mentioned in our opening remarks, it is important to ensure that charging caps apply to the default accumulation option to avoid inhibiting individual choice e.g. those wishing to purchase guarantees or access more expensive asset classes such as infrastructure and property. A.1.3. Do you agree that the age at which private pension wealth can be accessed should rise alongside State Pension age? We support maintaining the existing ten-year gap between private and state pension ages such an approach is supportive of phased retirement. Whilst life expectancy trends continue to impact the sustainability of state pension provision, we are also seeing major shifts in individual attitudes and behaviours. The latter are, at least, partially linked to the realisation that we are generally able to enjoy a healthier life expectancy and will experience a more active participation in society by our older ages. We expect the traditional view of retirement to continue to erode. For many people this will mean stopping work much later but for others it may mean a more flexible and phased approach to retirement and no longer working towards a fixed and final date for ending work. It is noted that the proposal to increase the age at which private pension wealth can be accessed is based on a shift from age 55 to 57 thus maintaining the ten-year gap between private and state pension ages. We believe that this is important in supporting personal choice and flexibility in allowing the phased approach to retirement that many will seek. Some will still want to start this process even earlier and those that can do so will utilise other forms of savings wealth, as indeed already happens. 6
A.1.4. Should the change in the minimum pension age be applied to all pension schemes which qualify for tax relief? Since simplification has gone hand in hand with freedom and choice at the heart of the reforms to UK Pensions, we see a level playing field as an important supporting element. Applying the same minimum pension age removes further complexities and would aid a more commonly understood system. We have a technical query relating to paragraph 3.31 in the consultation document. The text here seems to indicate age 57 will become a blanket minimum retirement age that will, with the exception of early retirement due to ill health, apply to all schemes. Our reading here is that this implies existing protected early retirement ages may be removed and therefore has an impact on some scheme members. We would welcome clarification on this point. A.1.5. Should the minimum pension age be increased further, for example so that it is five years below the State Pension age (SPA)? Please see Consultation Point 3. We do not support a shortened minimum pension age on basis that this works against personal choice and flexibility. Whilst a minimum pension age set at five years prior to the SPA would allow greater savings accumulation this could also work against the spirit of facilitating personal choice and supporting flexible retirement. Maintaining the current ten-year gap in relation to SPA allows a suitable period for phased retirement approaches and supports individual choice in this respect. The onus on all parties must be to focus on the quality of retirement saving and degree of personal engagement. Significant progress is already being made in this area via auto-enrolment and other proposed pensions changes such as the pot follows member initiative. A.2.6. Is the prescription of standards enough to ensure the impartiality of guidance delivered by the pension provider? Should pension providers be required to outsource delivery of independent guidance to a trusted third party? If UK savers are to benefit from the intended freedom and choice in how they access their retirement savings, they will need to be able to access guidance of sufficiently high standard to allow them to make informed choices. Such guidance needs to be available to all savers regardless of their income or financial literacy and needs to be easily accessible as and when required. There will be an on-going aspect since for many it will now be less of a one-off (annuity) decision and more of a range of customer touch points at different retirement stages and decision points. Pension savers will need to be able to access regular, high quality financial guidance throughout their working lives and beyond. They will need to know that the support is there whenever they need it and we believe that providers need to respond with a practical mechanism that supports this demand. The scale of changes proposed in the 2014 Budget calls for a fundamental rethink in the way that savers are supported in informed decision making and also an acceleration in current trends. In our view the logical and most suitable bedrock of this approach would be the provision of free and comprehensive guidance programmes where the dominant features would be clear and engaging digital communications (online and mobile based technologies tools, simple modelers, informative content and the provision of a retirement dashboard enabling the individual to track investment, income and glide path needs) with supporting interpersonal services (predominantly telephone-based support with some online direct communication). 7
The core principles of pension provider guidance should involve: (1) suitability for the majority of clients, (2) cost effectiveness, and (3) transparency of the guidance outcome (in particular the default option). On the first two points, we believe it important to strike a balance between addressing the needs of the widest possible audience and doing so without increasing the cost of service provision which ultimately reduces investor returns. Technology and scale will be central to accomplishing this outcome. On the third point, because scalable guidance seeks to be appropriate for most, but not all instances, it will be important for providers to be transparent on how money will be invested in the absence of instruction from the investor (i.e., default options). Then individuals can take the decision as to whether it is worthwhile to pay for further advice from an independent financial adviser or other qualified professional. We also believe that organisations, such as the Pensions Advisory Service, will have an increasingly important role to play in complementing guidance given by providers and in helping to design industry standards. We agree that face-to-face financial advice (as opposed to mere guidance) will have a place in those situations where personal financial affairs and taxation implications are more complex and for those that specifically wish to access and pay for such support. In the savings accumulation phase we see a place for workplace access to other forms of support ( face to faces ) e.g. onsite presentations to larger groups of employees, webinars via employer portals etc. as part of an overall provider to employer support programme. We should also recognise that in some cases existing trust based arrangements incorporate guidance and support often to a high standard. However, employee and trustee engagement with post-retirees will not be a feature in most cases and hence achieving direct engagement between provider and individual will be key. Strong standards in guidance through the entire end-to-end accumulation and decumulation default journey will be crucial. We advocate the setting of impartial guidance standards which providers will adhere to in a similar vein to Treating Customers Fairly (TCF) principles. There are clear parallels here with all six of the TCF outcomes. We believe that suitable guidance standards would negate the need for a default option of outsourced guidance. Providers could then be focused on the provision of a high quality guidance proposition whilst still allowing those that would prefer to seek personally sourced advice to do so. The provider guidance we propose will not be detrimental to the (full) advice market. Whilst market data shows that the take up of regulated advice remains relatively low we should expect to see an increased awareness of provider-generated guidance. Impartiality could be shown by adherence to some form of kite-marked standards to reassure savers that they are receiving consistent standards of guidance. This could have added benefits if providers of guidance were able to benefit from some form of safe harbour with limited liability provided these impartial standards have been met. A2.7. Should there be any difference between the requirements to offer guidance placed on contract-based pension providers and trust based pension schemes? The comments provided under Consultation Point 4 also apply here. We support removing as much complexity as possible to deliver the overriding goal of simplicity in the provision of pensions. There cannot be any customer virtue in adhering to two sets of guidance requirements when at the heart of the issue is one need for consistently high-quality support. 8
It is important however that positive practices in the trust-based market are still encouraged. For example if trustees or providers have pre-existing guidance and support provision that goes beyond the guidance guarantee, this should not be disincentivised by the new policies. Whilst the contract-based and trust-based pension scheme models exist to support differing needs in scheme provision there has been increasing recognition of common aspects around areas such as governance (e.g. independent governance committees). A.2.8. What more can be done to ensure that guidance is available at key decision points during retirement? Given the importance of guidance to planning retirement there will be increasing saver demand for access to the type of guidance and direction which is likely to fall under the current definition of investment advice. This is likely to be the case where the saver is asking for guidance to choose between one savings option as opposed to another. Under the current regulatory regime the full service advice model is relatively expensive to provide and the cost of paying for such advice acts as a disincentive to many retail savers from taking appropriate guidance / advice. We recommend that HM Treasury works closely with the FCA to determine the feasibility of a simplified advice model which would allow providers and other market participants to go beyond the minimum standards of the proposed guidance guarantee and serve the needs of mass market savers in a cost-effective way. This is a further important point to the arguments set out under Consultation Point 6. A comprehensive provider owned guidance approach would support the availability of such guidance at the key times. Integration in the communications approach could reinforce the availability and positioning of the guidance e.g. regular digital and printed communication, annual statements that signpost to online services and telephone support for review points. The approach needs to support a path through the accumulation and decumulation phases. In the former, savers will need to consider their preferences for income at retirement and gear their savings plan and investment approach accordingly. Providers will therefore need to extend existing customer engagement propositions here. In the latter, as previously stated, retirement guidance is no longer a single event but rather an on-going activity. Providers can support through clear checkpoints in the way we have already outlined particularly important events being age 55 when benefits can be first accessed, and the date ten years prior to when the individual plans to access their retirement savings, typically when most plans move into a de-risking phase. At this stage, fund choice linked to the intended retirement path will be key to providing a holistic view of financial planning which starts well before the point in time when savings are accessed. Savers will need guidance on an on-going basis since for many it will now be less of a one-off (annuity) decision and more of a range of customer touch points at different retirement stages and decision points. An individual s retirement needs will vary in their 60s, 70s and 80s and they will need access to ongoing guidance to ensure that their original choices still reflect their retirement needs. We believe the demand for guidance will be significant and pension reform needs to ensure that there are sufficient resources both human and capital to meet demand. 9
Section A3 Defined Benefit Schemes and Section A3.9 Should the Government continue to allow private sector defined benefit to defined contribution transfers and if so, in which circumstances? Yes, we believe the Government should continue to allow private sector defined benefit to defined contribution transfer subject to some protections and restrictions. In practice, we believe that even where individuals have the choice and flexibility to transfer, most are likely to stick with their DB pensions. Individual savers need to be protected by ensuring fair transfer values and impartial advice or guidance regarding the relative values of the benefits offered under the different arrangements before proceeding with a transfer out of their DB scheme. We believe that DB schemes will continue to benefit from economies of scale and access to a wider range of investment opportunities, and so individuals will need to take care when considering such a move. This will need to be set against the need of corporate sponsors who are likely to be supportive, because even at fair value, transfers reduce the cost of funding DB legacy schemes. We believe that transfers should be restricted for DB pensions in payment as otherwise this would introduce adverse selection opportunities. This would align the approach with that for DC where an individual with an annuity contract is prevented from terminating that contract. A3.10 How should the Government assess the risks associated with allowing private sector defined benefit schemes to transfer to defined contribution under the proposed tax system? If transfers from DB to DC are allowed to continue, then there are a number of associated risks. First, defined benefit schemes may need to maintain higher levels of liquidity than they would have to otherwise. This could result in defined benefit schemes achieving lower returns and / or illiquid assets such as infrastructure facing lower demand from defined benefit investors. Overall, however, DB investments in illiquid assets are currently low and are far from a position where transfers should constrain investment strategy. Nevertheless, DB funds would need to have mechanism in place that could be invoked in case of a run on a DB fund. Second, as highlighted in our answer to question 3.9 above, individuals face the risk of receiving reduced benefits following a transfer of their pension pot from DB to DC. Ultimately individuals should be allowed the right to decide provided they have been made fully aware of the risks and the costs and have received appropriate guidance. While, not necessarily appropriate for the majority, there are circumstances where savers may consider it prudent to hold the value in a pot which could be accessible by either the pensioner or ultimately their dependents. 10
A4 Financial Markets and Investment A.4 The Government would welcome views on any potential impact of the government s proposals on investment and financial markets. Overall, we believe the impact will be positive and enable individuals to engage with and take control of their pension savings. Coupled with initiatives such as autoenrolment in time this will facilitate an increase in savings by UK savers enhancing their long-term financial security. We also believe that the issue of liquidity within pension schemes warrants further consideration. We reiterate our view that the constraint on DB investment is unlikely to be a problem until pension funds are much more mature. We also recommend encouraging consideration of how to enable DC savers to invest in less liquid assets since they will often have literally decades to invest before they can withdraw anything. 11