FCA pension report leaves insurance market reeling | Video

World Finance interviews Tom McPhail, Head of Pensions Research at Hargreaves Lansdown, about the impact of the FCA pension report on the insurance market

April 11, 2014

The rip-off pension enquiry report that led to a massive destabilisation of insurers is continuing to rock the industry. But is putting more power in the hands of the public really the right move? And who stands to gain the most? Head of Pensions Research at Hargreaves Lansdown, Tom McPhail, shares his insight on the subject.

World Finance: First let’s talk about some of the most dramatic events that have taken place over the last couple of days. Of course we had the Financial Conduct Authority put out its report, saying it was going to closely review 30 million policies sold from the 1970s to 2000, and of course that led to a massive destabilisation of many insurers, they saw their stocks plummet by as much as 3.5 percent. Afterwards the FCA decided to go back and clarify a bit… What do you think of their handling of this situation?

Tom McPhail: I think the FCA perhaps with hindsight recognises they didn’t handle this particularly well. And of course this comes in the context of the budget announcement only a couple of weeks earlier, when the chancellor’s announcement that he was going to change the rules on how people draw their pension pots out had already caused a lot of disruption in the insurer market, with some insurance company share prices falling up to 50 percent on the day of the budget!

So they were still feeling pretty sensitive. With this FCA announcement, which again caused disruption in the insurer market, and several hours later the FCA came out with this clarification to explain that, perhaps they’d overstated a little bit. It’s been a pretty turbulent time for the market as a whole, and we’re still trying to work through the implications of it all.

World Finance: Moving on from the announcement, let’s look at some of the potential implications this could have. Could we see a PPI level payout in the near future?

Tom McPhail: I think it’s unlikely it’s going to go that far. But it is still very significant, because it will encourage investors to take a closer interest in that stagnant money, those zombie policies as they’re sometimes called. These old investment and pension plans that have been sold over the decades, which are in many cases levying fairly high charges, not delivering particularly good investment returns.

So stirring that all up is potentially good news for investors, and potentially bad news for those insurers who are banking on the profit stream they’re getting from that back book of business. So any destabilisation there is unsettling for them.

World Finance: Now it appears that there might be some sort of antagonistic relationship that’s set up by the government, that wants to do right by the public, and then of course we have these insurance companies that are facing a lot of criticism. But in a perfect scenario where you have an ageing demographic that the government says it’s not able to fully support, shouldn’t we have a robust insurance industry that’s able to provide for them?

We actually need people to save more money, because we probably don’t have enough money in the system to meet all the bills

Tom McPhail: Absolutely we need a robust insurance industry, and stability in the system is very important. And this was the concern about the way that the FCA’s announcement was handled last week: it created disruptions in the marketplace, it was unsettling. So stability is highly desirable. But it is also highly desirable that we have a competitive marketplace so that consumers are buying good quality products that are competitively priced. The best products possible to meet their needs, and also that they’re buying the right products. That they’re making good investment and buying decisions.

So we need market competition, we need consumers giving guidance where they need it, or good information where making their own decisions. Bottom line? We actually need people to save more money, because we probably don’t have enough money in the system to meet all the bills.

World Finance: Well speaking of that guidance that you just mentioned, let’s look at people who may draw pensions early. Do you trust them to make the right decisions with so much of their hard-earned cash?

Tom McPhail: Our experience at Hargreaves Lansdown advising clients is typically, yes. People in their 60s and 70s are by nature fairly cautious, and are probably not going to go and be reckless with the money. But of course people are retired for 20 or 30 years, maybe more! And what starts off as a good intention can still end up with them drawing down their money and perhaps running out of money as they get into their 80s and 90s.

So we do have concerns about that, and there’s a real challenge there for the industry as a whole to help people to do the right thing. And if we fail at that then there is a real risk that we’re going to see lots of money wash out into the economy; in the short term that’s great, but in the longer term we end up with a lot of poverty-stricken pensioners, and that’s clearly not good.

World Finance: If we do see people getting those big lump sums, that’s a lot of money. We could be talking in the thousands, sometimes even more. Fund managers would stand to gain, don’t you think?

Tom McPhail: Yes, potentially. I think we are going to see a lot of money washing out of the pension system, into the marketplace. It’s going to be looking for a home. In some cases people who would have been buying annuities are going to choose to keep the money invested in funds, so there are opportunities there.

People in their 60s and 70s are by nature fairly cautious, and are probably not going to go and be reckless with the money

In some cases they will pull the money out of pension funds, reinvest it into other tax-exempt products like ISAs, and again therefore opportunities for fund managers there. But the interesting bit of all of this is we don’t know what the behavioural response from all these investors is going to be. And we’re talking about huge sums of money here, so there’s a lot to play for!

World Finance: Of course we don’t know what’s going to happen, but what would happen if they have these options open to them? Do you think this is a good thing from the consumer’s perspective?

Tom McPhail: It’s potentially a good thing from the consumer’s perspective, because it sends a very clear message. This is your money, you need to take an interest in what’s happening to it. Now that’s a great starting point, because that typically gets people’s attention. The challenge then for the industry is to make sure that they help people to do good things with the money. And so the government’s already said the industry should look to give people guidance at the point of retirement. But again: is there adequate regulation in place to make sure that people are encouraged to do the right things with the pots of money when given the opportunity to do so?

World Finance: Okay, do you think pension liberation is a good thing for the economy?

Tom McPhail: No I don’t. I think the real risk is if you get people pulling money out too early, that when they really need the money further down the line, there’s nothing left to live on. So it’s about good financial education, it’s about putting in place the right rules and structures to protect people from taking negative actions, and trying to encourage them, perhaps, to save a bit more. So that when they do get into their later life they’ve got enough to live on.

World Finance: Okay well thank you so much for joining us today.

Tom McPhail: Thank you.