Guaranteed Income for Retirees

Tuesday 17th November 2015 Westminster Hall

[Mr Clive Betts in the Chair]

14:30

[Ian Blackford (Ross, Skye and Lochaber) (SNP)]

I beg to move,

That this House has considered Government policy on guaranteed income for retirees.

It is a pleasure to serve under your chairmanship, Mr Betts. It is also a pleasure to see the Economic Secretary here to respond to the debate, given the popularity of pensioners to the Government and to the rest of us. I know there is always some conflict between the Department for Work and Pensions and the Treasury regarding who has responsibility for such matters.

I am delighted that we are having this debate. We in the Scottish National party believe that the Government have a duty of care to ensure that our elderly population has security of income in retirement, and healthy and fulfilling lives. The Government should also ensure that they carry on as much as possible of the progress made in the last few years in ending pensioner poverty. I want to focus specifically on the pension freedoms that were introduced in April of this year, and the responsibilities that we in the SNP believe the Government should have for pensioner protection.

We in the SNP support many of the measures introduced over the last few years to encourage and enhance the growth of pension saving, while recognising that there is still some way to go before we reach a level of saving that matches the desire of many of our citizens to have an adequate level of income in retirement. To that extent, we support auto-enrolment and look forward to taking part in the debate over the coming months and years about how it can be strengthened, based on the three pillars of individual, employer and Government incentives to engage in pension saving.

It is in that regard of encouraging pension provision that we should take stock of the pension freedoms introduced in April and, in particular, consider what steps might be appropriate to ensure that the principle of securing an income in retirement is supported and fostered. When pension freedoms were introduced, the Chancellor of the Exchequer said that people

“should be trusted with their own finances”.—[Official Report, 19 March 2014; Vol. 577, c. 793.]

Although that is an admirable aspiration, it must come with the recognition that there has to be protection from pensioners aggressively running down pension pots to the extent that pensioner poverty could creep back on to the agenda. We should be mindful of the fact that a pension is a deferred income. It is not a cash machine, but is there to deliver security in retirement.

The untested nature of the pension reforms poses a potential risk to individuals and to the state. It is essential that the Government closely monitor consumer outcomes and identify risks to the state and to individuals over the longer term.

In the context of this debate, the Strategic Society Centre published a paper in July year entitled “Income, Security and Wellbeing”. The report was commissioned to explore the potential impact on people’s retirements of lower private pension incomes that might result from the freedom of choice changes. The Strategic Society Centre undertook quantitative research, looking at how the level of guaranteed income affects people’s experience of retirement. It found that, regardless of the level of someone’s financial wealth, the level of guaranteed income is significantly associated with various aspects of wellbeing and leisure, including going to the cinema, reading a daily newspaper, taking a holiday and participating in community groups and other activities. The study also found that income is associated with how people feel about their life and whether they report, “The conditions of my life are excellent,” and “I have got the important things in life that I want.”

In the light of the research findings, the Strategic Society Centre set out a number of policy recommendations, including the need for the Government to actively

“promote receipt of a guaranteed income in pension policy to improve the wellbeing of retirees. Educate savers before retirement about the role of guaranteed income for a good retirement. Include information about the importance of guaranteed income to wellbeing in retirement in Pension Wise guidance and information. Ensure receipt of a decent, guaranteed retirement income is the default option for DC”—

defined contribution—

“pension savers. Undertake regular research into the effect of the April 2015 changes on older people’s wellbeing.”

The Strategic Society Centre study has been followed up by a study into pension flexibilities by the Social Market Foundation, which has left me increasingly concerned that the Government have not yet put in place adequate safeguards for older people opting to free up pension assets.

With life expectancy increasing and savers gaining unprecedented access to their pension savings, the Government have an obligation to oversee individuals planning ahead and to support society to plan for the future by making the public aware of the importance of securing a guaranteed income for life. As I have said, pensions are a deferred income and should not be seen as a cash machine. We in the SNP are not against people having an element of choice, but there must be a guaranteed income before funds can be drawn down, to protect individuals in later life.

Before April 2015, 75% of people with defined-contribution pension schemes used them to purchase an annuity. We should also recall that the opportunity existed for pensioners to take up to 25% of their pension pot as a tax-free lump sum. That mixed ability to draw down cash and to secure a regular income is still, to us, far and away the most attractive option for most pensioners. A key advantage of annuities is that they provide a guaranteed income throughout retirement, protecting individuals from longevity insurance and investment risk. However, annuities have become unpopular with some consumers, partly because annuity rates have fallen, but also because of reports by important bodies such as the Financial Conduct Authority, which have highlighted ways in which the market has not always worked well for consumers. Also, many prospective pensioners did not shop around, and whether consumers were getting value for money was therefore a cause for concern. We acknowledge all those things. There was, and is, a case for reform, but in our opinion the challenge was to enhance the market for annuities.

Many people welcomed the principle of increased choice introduced by the Government, but there were also concerns that that would bring with it a significant burden of responsibility on individuals to understand the complexities of the choices they were making, leaving them to bear the risk that the value of their savings might fall and that they might even exhaust them prematurely, leaving them dependent on the state pension later in retirement.

There is also the potential for scamming. The report of the Select Committee on Work and Pensions, entitled “Pension freedom guidance and advice”, states:

“Readier access to pension pots combined with the difficulties consumers have in making decisions regarding retirement finances mean that the pension freedom reforms have increased the potential for scamming.”

Regulators are also working to raise awareness. The FCA has launched the ScamSmart campaign and has taken enforcement action in a number of cases.

I acknowledge that the Government’s establishment of Pension Wise is an important step, but take-up of the service has been limited. The Work and Pensions Committee recommended that the Government urgently redouble their publicity efforts about pension scams and that the FCA tighten its scam awareness and reporting requirements for regulated firms.

[Mr Jim Cunningham (Coventry South) (Lab)]

I congratulate the hon. Gentleman on securing this timely debate. He mentioned that there have been abuses since the new pensions regulations came into effect, and it is right that the matter should be looked at. He is also right that there should be some guarantees and better policing. In the past people took out annuities for mortgages, and I am sure we all remember the mortgage scandal. Does the hon. Gentleman agree that there is a real danger that the same thing could happen in this case unless there is proper policing and regulation?

[Ian Blackford]

I thank the hon. Gentleman for his contribution. I agree that all of us in this House have a responsibility to ensure that an adequate level of protection is in place for consumers. We must learn from the large number of mis-selling scandals that have happened over many years. I am concerned that, as things stand, there are not yet adequate safeguards in place to protect consumers from the changes.

The Work and Pensions Committee described the scarcity of information about Pension Wise as being

“not conducive to effective scrutiny”

and asked the Government to publish statistics on a quarterly basis, including on the take-up of the different channels of guidance and advice, and on the reasons for not taking them up. The FCA claims that eight out of 10 savers would have got a better deal if they had shopped around when choosing the best product for retirement. That illustrates another reason for clear, understandable, accessible guidance for consumers. The untested nature of the reform demands close monitoring and data collection.

[George Kerevan (East Lothian) (SNP)]

I, too, congratulate my hon. Friend on securing this debate. To add to what he has said, when I questioned the FCA in the Select Committee on the Treasury, they said they were worried that not enough time had been given for new products to emerge for savers drawing down their pension pot. The Chancellor announced the change rather precipitously, and a longer timescale might have allowed those new products to emerge.

[Ian Blackford]

I agree with my hon. Friend, although I come back to the fundamental point that what we need is reform of the annuity market. I am not sure that the products that may come to the market over the coming period will do what we need them to do, in allowing the level of consumer protection and choice that we are talking about.

Witnesses to the inquiry by the Work and Pensions Committee, such as the Financial Services Consumer Panel and the Pensions Policy Institute, said that it was essential to enable the policy to develop in the light of experience. The Committee recommended that the Government publish regularly data encompassing

“customer characteristics including pension pot size and other sources of retirement income…take-up of each channel of guidance and advice…reasons given for not taking up guidance and advice…subsequent decisions taken; and…reasons given for those decisions.”

[Roger Mullin (Kirkcaldy and Cowdenbeath) (SNP)]

I congratulate my hon. Friend on securing this debate, which is extraordinarily timely. Does he agree that there is a particular challenge with the gender divide? Women in particular are exposed to difficulties, largely because their pension pots tend to be smaller. Added to that, the Women Against State Pension Inequality campaign pointed out that after the Pensions Act 2011, some women born in the 1950s were given little notice and utterly inadequate guidance in preparation for the sudden extension of the retirement age. Does my hon. Friend agree that, because of that and the inadequate information on pension freedom, women are exposed to particular risks?

[Ian Blackford]

Yes, I do, and I was going to come to the issues of gender, because they are important in the context of this debate. My hon. Friend makes some reasonable points. When we talk about the risk of pensioners exhausting their pension pot, we know that that is particularly true for women, given two factors. He alluded to the first, which is that women in general tend to have smaller pension pots. They also tend to have longer life expectancy, and there are particular issues in that regard. The second factor relates to the reforms to the state pension, which I argue have not allowed for a significant length of transition, thus yet again exposing women to a much greater extent than men to the negative side of the changes. I would like to see the House come back to that debate.

The Financial Services Consumer Panel and the Pensions Policy Institute called for a rolling research programme to tackle the longer-term consequences of pension freedom decisions. Some organisations have called for action to require providers to offer default options for people who do not make a decision. The Pensions Policy Institute has argued that that would mean people being offered something with an element of life expectancy insurance that would kick in at some point when they get older.

We must learn from experience elsewhere. The Social Market Foundation has looked at overseas experience to see whether there are lessons for the UK. The SMF report, “Golden Years? What freedom and choice will mean for UK pensioners”, modelled the potential long-term outcomes for UK retirees based on outcomes in Australia and the USA. It looked at three scenarios: a “cautious Australian” who decumulates their pension wealth by less than 1% a year; a “quick-spending Australian” who decumulates very quickly and exhausts their pot by the age of 75; and a “typical American” who draws down his pension pot by 8% a year. The report’s key findings include the conclusion that:

“UK retirees are at risk of pension pot exhaustion.”

Those who follow the “typical American” path or the “quick-spending Australian” path would on average exhaust their pot by retirement year 17 and year 10 respectively.

Retirees are at risk of low replacement rates. Retirees who over-consume in early years of retirement may enjoy a rate of income closer to their working income for some time, but will then face much lower rates later in life. Retirees are at risk of low incomes. The new state pension and pension credit mean that retirees are at a low risk of falling into poverty, but retirees are at substantial risk of falling below the 70% median low-income threshold in later life if they spend their pensions quickly.

Preservation of pension wealth is possible through under-consumption, but has big drawbacks. The “cautious Australian” path results in a very low risk of running out of pension wealth, but means that people would receive very low levels of income as a consequence. That can mean a reduced income and lower replacement rate, as well as subdued demand across the broader economy. Retirees face variation in investment returns and uncertain incomes. Investment returns can result in huge variations in incomes in retirement and in the age at which pension savings run out. There are significant risks to the state as a consequence. Decumulation paths could also mean fiscal risks to the state associated with the costs of increased claims for means-tested benefits.

[Mr Jim Cunningham]

The hon. Gentleman is being generous in giving way. What he is saying prompted a thought in my mind: if pensions are mishandled by individuals, we get a problem later in life with the need to pay for care, which adds to pensioner poverty. People are struggling to pay for care, but pensions freedom could make that worse if it is not regulated properly.

[Ian Blackford]

The hon. Gentleman is absolutely spot on. One of the examples given in the SMF report is of an individual with a pension pot of £184,000. Many people would consider that to be a reasonable sized pension pot. However, based on the behaviours I have described, it would not be unexceptional for them to exhaust such a pension pot and have to rely on the state in later life for support, particularly with council tax and care costs. That is why, for two reasons, this is such an important issue for us to discuss: first, because we are exposing the consumers of this country to risk; and, secondly, because we run the risk of placing an additional burden on the state as a consequence.

Specific sub-groups are also exposed to enhanced levels of risk. Those sub-groups include women and early retirees who are likely to face a longer period of retirement; those without other savings or assets to fall back on, particularly non-homeowners; and those with defined-contribution pension savings only, who will not have other private income to top up their budgets. The report recommends that the Government develop an early warning system to monitor closely what retirees do with their pension savings and identify risks to groups of individuals and to the state. That would involve the creation of a retirement risk dashboard to help the Government to monitor retirement decisions and to provide a view on long-term outcomes for consumers and the state. By establishing personal pension alerts, it would also allow for policy makers to intervene where appropriate with the sub-groups the Government have identified as being at particularly high risk.

The level of uncertainty about the impact on savers is concerning. The Office for Budget Responsibility said that there was a high level of uncertainty about the Exchequer impact of the reforms and that the impact depended on take-up and other behavioural responses, which were uncertain. The OBR said:

“Some people will temporarily increase pension saving in order to benefit from tax-free lump sum withdrawals. It is possible that funds will be redirected from annuities and into other assets, such as other financial products or housing. It is also possible that such funds could be used to finance consumer spending”.

Would we consider that to be desirable?

The available data for the first quarter of 2015 show sales of drawdown products increasing and those of annuities reducing. The number of income drawdown contracts sold by Association of British Insurers members during quarter one of 2015 increased by 64% over the past year, from 6,700 to 11,500. The number of annuities sold continued to fall, with 20,600 annuities sold in quarter one, compared with 28,700 in the previous quarter and 74,100 in quarter one of 2014. The volume of interest is indicated by the 80% increase in provider call volumes during the first six months compared with the same period in 2014. A consequence of the changes is the massive £2.5 billion paid out as cash to customers in the first six months. To put that into context, £2.5 billion has been invested in other pension products over the same period. In other words, 50% of the value of pension pots accessed has been cashed in over the past six months.

We do not know what the long-term developments will be, but that must surely raise concern that such a high percentage of cash has been withdrawn. If we put that in the wider context of defined-contribution pension pots, there is today approximately £175 billion held in those pots by more than 2.2 million consumers. Do we as a society want to see pensioners draw down their pension pots at such an aggressive pace? Frankly, I believe we should not. There will be a price paid both in terms of pension pots running out and, ultimately, as has been said by various hon. Members, the state will have to pick up the pieces and support those whose income has gone.

To reflect again on some of the numbers, 60% of all cash lump sums have been paid out to people younger than 60 and 80% to those younger than 65. In 95% of cases where cash lump sums have been accessed, the entire fund has been withdrawn, and fewer than one in 10 of those accessing their pension pots are using the Pension Wise service. The Government need to take on board the evidence of what has been happening and explore other options. Reinstating a requirement to annuitise would help to address some of the concerns.

The UK Government must learn the lessons from abroad. Concerns over the rates of exhaustion of pension savings and the subsequent impact on retirement income led the Australian Government to commission an independent review of their retirement system.

The Murray inquiry published a range of recommendations for the Australian financial system in December 2014, including a recommendation for schemes to put in place a default comprehensive income product for retirement to address longevity risk. In October, the Australian Government announced their intention to implement the inquiry’s retirement income default recommendation, and a consultation is expected later this year.

We also need to look at affordability—for example, by introducing measures to keep costs down; introducing products such as a NEST-style decumulation option to act as a beacon of good value; enabling the state to play a bigger role in providing a low-risk, good value alternative or capping charges in drawdown products; allowing Pension Wise to provide a personalised service or recommend specific products or options to consumers; or strengthening the disclosure and governance requirements relating to complex retirement income products.

I want to engage positively with the Government on how we in Parliament can together discharge our obligations to those who will be accessing their pension pots not just in the years, but the decades to come. Although it is understandable that we want to create opportunities for those with spending pots to make their own decisions about their plans for accessing cash, it must be done from the premise that we give clear guidance that securing a regular income in retirement should be the default position.

14:53

[Neil Gray (Airdrie and Shotts) (SNP)]

It is a pleasure to serve under your chairmanship, Mr Betts, although, following this morning’s footballing activities, perhaps it is more appropriate to say “captainship”. I congratulate my hon. Friend the Member for Ross, Skye and Lochaber (Ian Blackford) on securing this important debate, although I think it was remiss of him not to declare an interest earlier in his speech, given how much closer to retirement age he is than others in this debate.

All joking aside, the debate is important as we all have an interest in ensuring pensions are accessible, affordable and abiding, not just on a personal basis for all retirees, but for society in general. In recent times, pensioner poverty has declined considerably compared with other age groups as there has been a focus on pensioner income and supporting households in matters such as energy efficiency and central heating systems—indeed, the Scottish Government have supported a series of very successful programmes on this front—but income is the primary factor in poverty, regardless of what the Government plan to do on how we measure poverty. It is therefore critical that we guarantee that income levels remain consistent for retirees for the duration of their well earned retirement.

I certainly welcome the Government’s roll-out of auto-enrolment for workplace pensions. Ensuring that people save over and above what they should receive from the state pension is clearly very important. In the National Audit Office report on this subject released earlier this month, it appears there has been a very good uptake from workers and employers so far. That is to be welcomed.

I can understand why it is desirable to have pension freedom in the way the Government legislated for. Indeed, I am dealing with a case now where a constituent is looking to access his flexibility earlier than is currently available. It is certainly desirable for the Government to see people spending their pensions earlier. As the Government withdraw billions of pounds from the economy with their wholesale public sector and social security cuts, their growth target is under serious threat. I am sure they would be delighted to see people spending heavily from their savings upon their retirement to keep the economy ticking over, but there are great risks of unintended consequences.

There are many reasons why we are all paid salaries monthly or at regular intervals rather than in an annual lump sum. One of those reasons is our own budgeting convenience: it is far easier to plan in smaller monthly chunks than on an annual basis. So imagine the challenge facing retirees who are looking at taking their pension in one lump sum and not paying for an annuity. How can they plan what they can spend each week, month or year when they do not know how long it will need to support them for? There is no reason to believe that all pensioners will be rash or profligate when they are given access to their savings, but we must ensure that protections are in place so that they have a sustainable income for the duration of their retirement. I absolutely and wholeheartedly agree with my hon. Friend the Member for Ross, Skye and Lochaber.

A recent Social Market Foundation report highlighted several areas of concern for us. We do not believe that the Government have put in place the necessary safeguards to protect those approaching or in retirement. With life expectancy increasing and savers gaining unprecedented access to their pension savings, the Government have an obligation to assist individuals to plan ahead and to support society to plan for the future by making the public aware of the importance of securing a guaranteed income for life. If the Government get this wrong, they are storing up a massive future liability not only for pensioners, but for the state. I am not just worried about pensioners being able to manage their finances—the vast majority will have no problem at all—but I am worried about these big savings pots being incredibly attractive to scammers. We have all heard stories of perfectly plausible sales calls, door-to-door inquiries and fliers resulting in pensioners and vulnerable people being duped out of their savings. Having a pension in an annuity may not always give us the best deal, but it guarantees a lifelong income that the scammers cannot touch.

I welcome this opportunity to speak to such an important debate, and I thank my hon. Friend again for securing it. I hope the Minister will advise what steps her Government are taking to ensure we are not storing up major trouble for the future.

14:58

[Alan Brown (Kilmarnock and Loudoun) (SNP)]

It is a pleasure to serve under your chairmanship, Mr Betts. I, too, congratulate my hon. Friend the Member for Ross, Skye and Lochaber (Ian Blackford) on securing this debate. Although I have grey hair, I want to put it on the record that I am quite a way from pension age.

When I first heard of the Government’s pension freedom scheme, I thought it was a political gimmick. I hope that when the Minister sums up she will be able answer all the important questions raised and prove that it is a well thought out and evidenced policy. Otherwise, it is actually short-term isolated thinking.

If we take a step back, we see that when the original annuity system was introduced in the UK, life expectancy was considerably lower than it is today. Back then the state still felt a responsibility to try to ensure that people had a guaranteed income to look after themselves for the rest of their lives in some form of comfort. Just because the annuity system was not always maximised to the benefit of the saver—as we heard, 80% of people could have got a better deal if they had shopped around—does not mean we should scrap the system altogether. Instead, we should look at ways to improve it.

The recent message from the Government has been that people should save responsibly, and I agree. They have helped to force the issue with auto-enrolment. They have also said that people need to work or wait longer until they get their state pension. We are told that that is justified because life expectancy is much higher. There are contradictory messages: the left hand says, “Save. Be responsible. Understand that you might well have a nice long retirement to look forward to, consider and plan for,” but the right hand is saying, “Well done guys—you’ve worked hard. It’s your money—do what you want with it.” The Government should take cognisance of the fact that those are competing messages.

We have heard about the hidden unintended consequences of the pension freedom policy, one of which relates to the recent increases to the state pension age, which particularly affect women. Members will have been lobbied by Women Against State Pension Inequality. These women feel particularly hard done by: they planned to retire at a certain age, they worked all their lives with that plan in mind, but now they feel the opportunity has been taken away by the Government. Some women are now considering whether to access their pension pot early and effectively burn through it until they reach the increased state pension age. I am concerned for the women who stay on in work and, once they reach state pension age, retire and access their pension pot, who might feel that they have missed out by having to work longer and so be tempted to make best use of the money they have put by in a short time. That will not benefit them in the long run.

This is speculative, but another scenario I have considered is the fact that we currently have a housing shortage, combined with a Government who reinforce the message that home ownership is everything and is something to which families should aspire. If retirees have access to lump sums, they might want to access their pension pots to help their family out by getting them on the housing ladder. In the short term, helping their family looks like a good thing, but it will lock their money up for the future, so might not be right in terms of the long-term financial planning for retirees and their dependents. They are not, though, going to get that financial advice otherwise.

We have heard that the fundamental idea behind pension freedom is that we should trust people, but on balance that is not what the evidence suggests. The Government should look at the evidence from Australia and the United States, which suggests that a large percentage of pension savers spend all their money in a relatively short time. As we heard from my hon. Friend the Member for Ross, Skye and Lochaber, in Australia there are polar opposites in play: 40% of people use all their savings in just 11 years, while at the other extremity is a group of people who are too cautious and do not access their money to give themselves the high quality of life that they should have after saving responsibly. Reflecting that reality, Australia is now moving towards an annuity scheme. That is the red flag that the Government should be paying attention to. The Australian report was published before the Chancellor introduced the changes, so there is no excuse for not taking that evidence on board sooner.

There is more evidence of how people behave when given pension freedom from the United States, where half of retirees have spent their entire pension pot within 17 years of retirement—in real terms that is a really short amount of time. Overall, I fail to see the wider benefit of people having complete freedom when the evidence shows that pension contributions tend to be exhausted rather quickly. Aside from it giving a short-term feelgood factor for some people and a low-level cash injection to the economy because of the additional spend, I do not think complete freedom is the way to go.

I understand that populist policies are almost a necessary evil for Governments. As politicians, we all want to do things that make us popular, and Governments want to ensure that they are re-elected, but Governments should never forget that they have responsibilities. A default pension income for retirees would fall into the category of responsible governance; otherwise, there is a risk that future Governments will end up paying out more money in pensioner welfare. In all probability there will be a higher burden on the NHS because of the higher healthcare costs associated with retirees who have exhausted their funds—they are out and about less and they are stuck in homes that they might not be able to afford to heat. Those knock-on healthcare effects will have financial implications for the state in the long run. We know that the Government are hellbent on reducing the size of the state for the future, so that is counterintuitive. Again, the messages are contradictory.

There is very limited evidence in the public domain on how the new arrangements are working, but what evidence there is suggests that currently the majority of cash sums paid out go to people under 60 years old, and 80% goes to those under 65—so in many cases people well below state retirement age—yet only one in 10 people are accessing the Pension Wise service. At the very least, the Minister should consider the following. People should be given targeted financial guidance and advice before they access their pension funds. They should be made to think twice about making large cash withdrawals, especially when in some cases people are penalised by having to pay a higher tax rate, which again, is not beneficial in the long run. There should be mid-retirement health checks, although to be honest that might be too late for some, which is why we need reform sooner rather than later.

The Government must look again at what is happening now and come up with a compromise to ensure some form of guaranteed income for the future. They should consider the Australian Murray report and at least try to arrive at a mix of flexibility, which can be good for some people, and security for all retirees, so that they benefit from working hard and putting money by.

15:06

[Mhairi Black (Paisley and Renfrewshire South) (SNP)]

It is a pleasure to serve under your chairmanship, Mr Betts. I congratulate my hon. Friend the Member for Ross, Skye and Lochaber (Ian Blackford) on securing a debate on such an important issue. It is fair to say that I am a fair bit further away from this issue than most of my colleagues; nevertheless, I appreciate this opportunity to speak.

I am sure that most Members present will agree that the current Government—any Government, for that matter—have a responsibility to ensure that all members of our elderly population have a secure form of income upon retirement to enable them to live comfortable, healthy and fulfilling lives, as well as a responsibility to continue efforts to end pensioner poverty. Any move by the Government to encourage and enhance the prospects of people saving for retirement and to ensure that all our citizens maintain a decent standard of income must be welcomed. It is for that reason that, in the context of pension freedoms, the Scottish National party supports auto-enrolment. We look forward to taking part in the debate on how it can be strengthened, based on the inclusion of the individual and the employer and Government incentives to engage in pension saving.

With that in mind, we must pay close attention to the scrutiny and constructive criticisms that have been made of the pension freedom reforms. First, there clearly needs to be an increase in data collection. The Work and Pensions Committee inquiry into the changes asked whether people are adequately supported in making good and informed decisions, and concluded that appropriate information and monitoring arrangements are not in place to provide the answers. Criticising the Government’s failure to publish adequate statistics on the pension freedom policy, the report said:

“The Government’s reticence in publishing statistics on the effects of its pension freedom policy, a full six months after the reforms, is unacceptable. The scarcity of information regarding Pension Wise in particular is not conducive to effective scrutiny. It is also not conducive to effective policy: it would be fortunate in the extreme if such radical change operated as hoped without any need for adjustment.”

Many bodies in the pensions policy area have made similar observations. If we are to be able to make informed decisions and adequately respond to the changes the reforms are making to people’s lives and the decisions they make, we must be watching closely and at least attempting to collate in-depth and satisfactory data. That way, we will be able to form a real-life picture and idea of what is going on and to respond appropriately.

Secondly, more effort needs to be put into educating people so that they are equipped with the information and knowledge to make informed decisions. The potential for negative consumer outcomes arising from disengagement, low awareness of retirement risks and poor financial capability is likely to be compounded by supply-side failures. The FCA thematic review and retirement income market study identified continued failures: 60% of defined-contribution pension customers did not switch providers when they bought an annuity, despite the fact that 80% could get a higher—in many cases, significantly higher—income on the open market. The FCA found that 91% of those purchasing enhanced annuities could have got a better deal by shopping around. It also found that consumers are highly sensitive to how options are presented to them. Savers reaching retirement face a much more complex landscape than previous generations, and they will need support to make sense of their options and to make sensible choices that match their needs and preferences.

Even before the announcement of the pension reforms, the pensions industry was still working through many issues, despite seven years of heightened scrutiny and regulatory oversight. As many will know, lack of information has been a problem for some time. Given the lack of data on how pensions are being affected now, it is important to look at some of the few statistics that we do have.

[Ian Blackford]

Does my hon. Friend agree that one issue consumers face in the landscape of choices she eloquently describes is that they often do not consider their own life expectancy—that they might live for another 30 or 40 years or even longer? When people look at their experience of annuities, that is often part of the problem: they might consider they are getting a poor deal from their annuity, but that is because they are not taking into account how long they might live and how long they might have to fund their lifestyle for.

[Mhairi Black]

I thank my hon. Friend for that intervention—I was actually about to get on to that point.

In terms of the few statistics we do have, the Social Market Foundation has looked at the lessons the UK can learn from overseas experiences. My hon. Friend spoke about the different stereotypes in terms of how people engage with their pensions—the cautious Australian, the quick-spending Australian and the typical American. One of the report’s key findings was that UK retirees are at risk of pension pot exhaustion specifically because they underestimate how long they will live. In fact, those who follow the typical American path or the quick-spending Australian path would, on average, exhaust their entire pot by retirement years 17 and 10 respectively.

Retirees are at risk of low replacement rates. Retirees who over-consume in the early years of retirement might well enjoy a decent income for a good few years, but if they live a lot longer than they predicted, they find themselves on much lower rates later on in life and may completely exhaust their pension, putting the responsibility on to the state to fill the gap.

We should also consider the fact that the number of income drawdown contracts sold by ABI members during 2015 increased by 64% over the previous year, from 6,700 to 11,500. The number of annuities sold has continued to fall, with 20,600 sold during that quarter, compared with 28,700 the previous quarter and 74,100 in the same quarter in 2014. There was an 80% increase in provider call volumes during the first six months, compared with the same period in 2014. As has been mentioned, £2.5 billion was paid out as cash to customers in that period. Some 60% of all cash lump sums have been paid out to people younger than 60—those who have a considerable time left to live, given that life expectancy is now 80-plus. In 80% of cases, those who have taken out cash lump sums were under 65. In 95% of cases where cash lump sums have been accessed, the entire fund was withdrawn. As for evidence that people have engaged with Pension Wise, whether face to face, over the phone or by email, the reality is that fewer than one in 10 of those accessing their pension pots have used the service. It is clear that more can be done to educate people adequately.

My last point relates to the Government’s position. Concerns about rates of exhaustion of pension savings and the subsequent impact on retirement income led the Australian Government, which we look to for at least some idea of where pensions are going, to commission an independent review of their retirement system. The resulting Murray inquiry published a range of recommendations for the Australian financial system, including that schemes set in place a default comprehensive income product for retirement. On 20 October, the Australian Government announced their intention to implement the inquiry’s retirement income default recommendation, and a consultation is expected later this year.

It seems only reasonable and responsible, therefore, for the Government to tell people, “Look, the choices are there for you. It is not for us to tell you how to spend your money, but we recommend that you use your pension for the exact purpose it was created for and that you consider how long you will live for and how much money you will have, so that you engage with your pension appropriately.”

I welcome the debate, and I hope the Government take heed of some of the concerns that have been raised by myself, my colleagues and the relevant independent bodies.

15:16

[Nick Thomas-Symonds (Torfaen) (Lab)]

It is a pleasure to serve under your chairmanship, Mr Betts. It is also a pleasure to appear before the Economic Secretary to the Treasury for the first time.

I congratulate the hon. Member for Ross, Skye and Lochaber (Ian Blackford) on securing this timely debate. I agree with much of what he said. This is the time to take stock of the pension freedom reforms. The idea of monitoring and identifying risks is important, and I will return to that in a moment. The concepts of supporting society and planning for the future are also vital.

My hon. Friend the Member for Coventry South (Mr Cunningham) and the hon. Member for East Lothian (George Kerevan) made good points about choice and protection. My hon. Friend also made a crucial intervention about pensioner poverty, and it is important that we monitor that issue.

The hon. Members for Kirkcaldy and Cowdenbeath (Roger Mullin), and for Kilmarnock and Loudoun (Alan Brown), raised the issues faced by women born in the 1950s due to the increase brought in by the Pensions Act 2011 in the state pension age. In that respect, I have a question for the Minister about transitional provision. On 20 June 2011, the Secretary of State for Work and Pensions said:

“Let me simply repeat what I said earlier—it is a bit like a recording, but I shall do it none the less: we have no plans to change equalisation in 2018, or the age of 66 for both men and women in 2020, but we will consider transitional arrangements.”—[Official Report, 20 June 2011; Vol. 530, c. 52.]

What has happened on transitional arrangements since 2011? What meetings have been held on them? What proposals do the Government have to put such arrangements in place to assist women who lost out by virtue of the date on which they were born in the 1950s? I sincerely hope the Minister can deal with that issue today.

I congratulate the hon. Member for Airdrie and Shotts (Neil Gray) on his contribution. He made a good point about the problems that will arise in the future if the Government do not deal with these issues now. I also congratulate the hon. Member for Paisley and Renfrewshire South (Mhairi Black)—we can safely say that every Member of the House is closer to retirement than she is. She made a good point at the start of her speech, and the scrutiny and constructive criticism she mentioned throughout her contribution are precisely what needs to be brought to bear on these reforms in the months and years ahead.

The debate has been extremely useful in highlighting a number of issues that the Government need to deal with. The issue of scams came up, and it is crucial. In that respect, I quote the recent Work and Pensions Committee report:

“The pension freedom reforms have increased the prospects of people being conned out of their life savings.”

That should be a warning to the Government. The report also treats the promotion of awareness as a crucial weapon against those scams, and the Government should seriously consider paying more attention to that.

The hon. Member for Paisley and Renfrewshire South brought up the issue of Pension Wise. To deal first with take-up, the first set of statistics we have had seem to suggest that only about 18,000 people—fewer than one in 10—have accessed the guidance. Clearly, more needs to be done to flag up the availability of Pension Wise. Other criticisms in the Work and Pensions Committee report also need to be dealt with. The website has been described as not fit for purpose; the Government should attend to that damning criticism. The guidance has also been criticised for being too general on the one hand, in that it pays insufficient attention to people’s individual circumstances, and too narrow on the other, in that it deals with pensions but not the other things that people need to cope with in retirement. Pension provision is a crucial part of that, but people will have varying interests, such as property that they own, or their care needs. Those other things need to be taken into account in the guidance provided by Pension Wise.

Another issue is the advice gap. Someone whose pension pot is enormous will have access to expensive financial advice on it, and that would be proportionate. However, there is an enormous gap in the middle between people who have access to the free guidance, and those who obtain specialist advice at the top. Many people with pension pots will be in the middle, where such advice is not available. This is a two-way street: we want to increase demand from people who want advice, but on the supply side, we need a regulatory framework in which advisers feel comfortable and confident in giving advice, and about the liabilities to which they open themselves. In that regard I look forward to the results of the financial advice market review, but there is action that can be taken now, certainly as far as improvements to Pension Wise are concerned.

The hon. Member for Ross, Skye and Lochaber mentioned the Social Market Foundation’s recent “Golden Years?” report. That, too, should warn the Government about what can happen in these situations when policy is not managed appropriately in the short and medium term. He mentioned, of course, the cautious Australian, the quick-spending Australian and the typical American, but the statistics from Australia make sobering reading. It seems that about 25% of people exhaust their pension pots by age 70, and the figure is about 40% by age 75. Those numbers are highly significant, particularly in an age of increasing life expectancy. Our cautious Australian would decumulate by less than about 1% a year, which would be a more optimistic statistic; but we might compare that with the decumulation rate of about 8% a year for the typical American. That would be a far more worrying statistic to deal with.

There is a broader point to make. Advice and guidance are obviously important at the age of 55, but we must move away from the view that this is exclusively about making sure that people have the appropriate information at the start of their retirement. The reality is that people’s needs between the ages of, say, 55 and 65 are different from their needs between 65 and 75, or 75 and 85. Life expectancy is of course rising, and their needs would be different between 85 and 95 as well. I suppose that that point goes to the heart of what the debate is about: a guaranteed income—that is the phrase used in the title of the debate—throughout retirement. We must look beyond what happens at age 55, although that is highly important, at structured ways through retirement, in which people have access to the advice and guidance they need to make informed decisions. It is vital that the Government do that.

Overall, we can see today’s debate as a marker for the need for action. No one wants people to exhaust their pension pots at age 75. We want action now, to ensure that people will be protected from scams, and that they can get the advice and guidance they need.

15:25

[The Economic Secretary to the Treasury (Harriett Baldwin)]

It is a pleasure to serve under your chairmanship, Mr Betts. I am not quite sure what the sporting achievements mentioned earlier are, but I look forward to hearing about them.

[Mr Clive Betts (in the Chair)]

I think the word “achievements” might be stretching it a little bit, but we will pass over that for the time being. [Laughter.]

[Harriett Baldwin]

I congratulate the hon. Member for Ross, Skye and Lochaber (Ian Blackford) on securing the debate and making a thoughtful, constructive contribution to our national debate on securing a guaranteed income for retirees. Perhaps I should not confess this, but if Wikipedia is correct, I am the one who should declare an interest as being closest to retirement age of all those speaking in the debate—but perhaps Wikipedia may not be accurate. That has happened before.

[Roger Mullin]

I should thank the Minister very much for her comment.

[Harriett Baldwin]

The hon. Gentleman wears it well.

The debate is timely, because we are just over six months into the pension freedoms, and are beginning to get data on what pensioners or retirees have been doing with those freedoms, and about use of the free and impartial guidance from Pension Wise, which was set up by the Government. As we speak, life expectancy is growing by about five hours a day in this country, which makes it all the more important that we have this debate and agree on the aspiration to ensure that hard-working people are in a position to fund a comfortable and, we hope, increasingly lengthy retirement.

Against the background that I have set out, the Government introduced radical reforms giving people freedom and choice in how they access their own hard-earned retirement savings, replacing an effective obligation on pensioners to purchase an annuity—a product that often they did not shop around for and that may not have been right for their circumstances.

[Julian Knight (Solihull) (Con)]

The hon. Member for Ross, Skye and Lochaber (Ian Blackford), whom I congratulate on securing this important debate, mentioned at one point reinstating the requirement to annuitise. The old open market system failed many vulnerable consumers, as my hon. Friend the Minister mentioned, and many with impaired life expectancy were shunted by providers into poorly paying and inappropriate annuity contracts. Will she comment on that?

[Harriett Baldwin]

My hon. Friend is right; the world where we obliged people to buy an annuity income with their retirement savings was not perfect. Often they did not shop around—the data from the Financial Conduct Authority suggest that about eight out of 10 consumers could have got a better deal by shopping around—so I cannot agree with what I believe was SNP policy. That seems to be to end the current situation where there is more flexibility, and once again to require people to buy an annuity. However, I recognise that Members across the House have concerns about customers and how they are supported as they make perhaps their most important long-term financial decision, other than purchasing a home.

[Ian Blackford]

I just want to clarify something. I absolutely share the concern that the annuity market was not working properly. Where there is a difference of opinion is that we believe that the market should be reformed. We need greater choice in the annuity market: for example, we need to think about how we explain index-linked products in the annuity market, and circumstances such as lower life expectancy must be reflected. We must consider those things in the light of experience of what has happened with pension freedom.

[Harriett Baldwin]

I thank the hon. Gentleman for that clarification. I agree that we need to evaluate the measures, which is why this is such a timely debate. It is extremely important that, as people take advantage of the new pension freedoms, they have the right information and the tools they need to make an informed and confident decision about their financial future. I recognise that there is a range of different circumstances and that one size does not fit all.

It might be helpful if I summarise some of the changes made over the past five years to the pension landscape to strengthen the finances of people in retirement. They include ensuring that there is no enforced retirement age at 65, and strengthening the first pillar of retirement income, the basic state pension, which now rises with a triple-lock—increasing by the greater of 2.5%, earnings or inflation every year. That has been very important cumulatively over the past five years—the income replacement of the state pension is now at its highest level since 1992—and we have pledged to continue that throughout this Parliament.

[Nick Thomas-Symonds]

I refer back to the Hansard quotation from 20 June 2011 that I cited about the transitional provisions for women born in the 1950s who have lost out under the new state pension provisions. Can the Minister update the House about what has happened with that policy and how the transitional provisions will be introduced?

[Harriett Baldwin]

I assure the hon. Gentleman that I am just setting out the background. I will address the points that colleagues raised later in my speech.

The changes we are making to simplify the state pension are also important, because they are going to set a new level for the state pension that is higher than the means-tested threshold that we have had in this country historically. That is very important, because we do not want those who draw down their retirement savings to be thrown on to means-tested benefits. I believe I am right in saying that that is a crucial difference from the situation in Australia. We have also safeguarded support for older people in other ways, such as providing free bus passes, eye tests, television licences and so on.

The changes we made in April are an integral part of the whole landscape. I will describe for the benefit of all hon. Members what we think success for the reforms looks like: a vibrant and competitive retirement income market with a range of different products that give people the flexibility and security that is right for them, and well informed, engaged consumers who can access the guidance and advice they need. As more people are automatically enrolled in employer schemes, more people engage with the process. More than 5 million more people are now saving for a retirement income than were in 2010, and by the full roll-out in a couple of years’ time, we will have almost 9 million additional new savers through automatic enrolment, saving £15 billion a year more in aggregate.

[Ian Blackford]

I am grateful to the Minister for giving way; she is being very gracious with her time. As I said, we fully support auto-enrolment. It is fantastic that there has been an increase in saving and that both employers and employees are contributing, but will she reflect on the situation that could develop? People will have a greater ability to access the pension pot that they are saving into and take out cash at 55, but I am concerned that employers may be disincentivised from contributing to the pension scheme if they see that those who benefit from it can walk away with a cash pot at 55.

[Harriett Baldwin]

Methinks the hon. Gentleman is worrying too much. At this point, I think we will just welcome the fact that £15 billion a year more is going into pension saving in this country. The hon. Member for Paisley and Renfrewshire South (Mhairi Black) can say to her generation that the earlier they start, the better, given the cumulative impact of the wonders of compound interest. Nevertheless, I take on board the point the hon. Gentleman made.

The hon. Gentleman said that providers may not have time to get ready and may not have the right kinds of products. In fact, providers have stepped up to the challenge: the systems requirements were admittedly very challenging, but more than 90% of people are now being offered flexibility within their existing scheme and something like a quarter of the largest firms are planning to launch new products in the next six months, so there has been real innovation and engagement with what customers want. We have moved away from the inflexibility of the old annuity market.

The hon. Gentleman highlighted the recent data from the ABI stating that £4.7 billion was paid out in the first six months. The first six months will not necessarily be representative of the settled state of the market, because obviously there has been a lot of pent-up demand, but it is fair to say that in that six-month period £2.5 billion has been invested in income drawdown products and £2.2 billion in annuities. That does not suggest that people are shying away from the annuity market, which we hope continues to be successful and an important part of people’s retirement planning. I am delighted that so many people have already taken advantage of the freedoms and that many providers have stepped up to deliver for their members.

Many hon. Members asked about Pension Wise, the Government’s free and impartial guidance service. It, too, is playing an important role. There have been more than 30,000 guidance appointments and 1.7 million hits on its website so far. Hon. Members alleged that only one in 10 people are making use of Pension Wise, but we dispute that in the sense that people will be getting financial advice, sometimes from a regulated adviser, or they may get information, guidance or advice through their provider. There is a range of different ways in which people can inform themselves; Pension Wise is one of them. It is free, impartial and backed by the Government.

Pension Wise prompts users to consider their life expectancy and any health issues and lifestyle factors they have, and it links to the Office for National Statistics life expectancy calculator, which I am sure everyone in the room has visited. All in all, that is excellent news, but we are always on the lookout for ways to make the service more useful. Last month’s report from the Work and Pensions Committee, of which the hon. Member for Paisley and Renfrewshire South is a member, was welcome. It noted the progress we have already made in ensuring that the reforms deliver for consumers, but made it clear that the job is not yet done.

In line with the Committee’s recommendations, we are considering a number of developments to make Pension Wise even more useful. For example, we are looking at how appointments can be tailored to individuals. In the summer Budget, we opened it up to people from the age of 50 onwards, and we are developing more online tools for the website and calculators that people can use to see how the new pension freedoms relate to their particular circumstances. We are trying to make the website more interactive, and the team has done a fantastic job in delivering that to such a tight timeframe. We are looking to amend the content of Pension Wise appointments to ensure they are more tailored to people in the 50 to 55 age bracket, who are not yet able to take advantage of the pension freedoms but want to start thinking about the options available to them.

The hon. Member for Torfaen (Nick Thomas-Symonds) rightly mentioned the financial advice market review. I am delighted to hear that he supports the initiative. The Treasury and the Financial Conduct Authority are reviewing what he called the advice gap—the fact that between guidance and paid-for financial advice, there is a gap for ordinary people who do not want to pay for a financial adviser or are not able to afford one at their stage in life. The aim of the review is to come up with a package of reforms, along the lines of those that the hon. Gentleman outlined, to ensure the financial advice market works for everybody. I hope he will write to the review with his recommendations.

Advice, in and of itself, is not enough. It is important that we supplement our guidance provision and review it on an ongoing basis. We must ensure that we make the most of Pension Wise, which focuses on pension freedoms, the Money Advice Service, which focuses on some of the other aspects of financial markets, and the Pensions Advisory Service, which is run out of the Department for Work and Pensions. We must make those services more effective for consumers. Alongside the financial advice market review, we are also looking at the guidance and hope to have some findings ahead of next year’s Budget, so that people get the help they need to take such important long-term decisions.

Several hon. Members mentioned scams, and the Work and Pensions Committee report also flagged that risk, which we recognise is not new. Pension scammers were previously trying to get people to take money out of their pensions before the age of 55, causing a lot of harm in the marketplace, but I agree that it is an important matter. Given that consumers have been given unprecedented freedom and choice in how they access their retirement savings, we appreciate that fraudsters will use that as an opportunity to try and exploit people. An effective strategy to target scams must bring together all the relevant parts of Government and work with providers to focus on both the prevention and the disruption of scams. That is what we are doing and will continue to do. We have set up Project Bloom, a multi-agency taskforce led by the National Crime Agency, which is joining up the various Departments involved, the regulators, anti-fraud groups and police forces to tackle scams. It is worth reiterating here how important it is that we remind consumers that they should never engage with anyone who telephones them out of the blue offering help with their pension. I encourage all hon. Members to get that message out widely in their communities. I emphasise that Pension Wise will never call without a consumer having previously asked them to.

The pensions regulators have their own pension scam campaigns to raise awareness of the issue. The FCA runs ScamSmart and the Pensions Regulator runs Scorpion. Warnings are sent out with paperwork from pension providers and both of them give advice to businesses and consumers on how to protect against scams. Pension Wise also alerts customers to the risk of scams during guidance sessions and on its website, and firms have a duty to flag the risk of investment scams, when appropriate, to their members as part of the FCA’s retirement risk warning rules. The hon. Member for Paisley and Renfrewshire South, who asked me about this during a Work and Pensions Committee hearing, wanted to know about some of the numbers. So far this year, since the pension freedoms were launched, incidents reported to Action Fraud are lower than the year before, but I completely agree with her that we must remain on top of this. To be frank, we have to be tough, because one scam succeeding is one too many.

Moving on to women who have been affected by the change in pension age, I am probably one of the few women affected who actually welcomes the fact that I will be able to do this wonderful job for longer, but I realise that not everyone feels that way. To respond to the questions from the hon. Member for Torfaen about the number of meetings that have been held, the number of updates and the transition protection and his Hansard reference, which shows what an effective researcher he is—he is a published biographer—I will defer to my colleague Baroness Altman, who will write to him with the details.

The hon. Member for Paisley and Renfrewshire South also asked about the Pension Wise data and when it will be published. In ministerial speak, I believe that the word is “shortly” so it should be up on the website soon. We will write to the Chair of the Work and Pensions Committee as soon as that happens so that he is the first to know.

I have responded to most hon. Members’ points, but I will remain on my feet in case anyone feels that they have not had a chance to ask their question or to get one answered.

[Roger Mullin]

I thank the Minister for giving way at this late stage. Does she agree that, as I mentioned earlier, women face particular risks and therefore require particular additional support and guidance to ensure that they make the most of their futures?

[Harriett Baldwin]

I am sure that, like me, the hon. Gentleman is a passionate feminist and thinks it important that men and women have the same pension age. I appreciate, however, that the process of transition from the much earlier age at which women were retiring will, depending on people’s circumstances, have posed a range of challenges, of which the Government are well aware. As a constituency MP, I am also well aware of such issues. I will write to the hon. Member for Torfaen and the hon. Member for Kirkcaldy and Cowdenbeath (Roger Mullin) with more specific points from my noble colleague.

Shall I conclude with my impassioned concluding remarks, Mr Betts, or is everyone happy to stop there?

[Mr Clive Betts (in the Chair)]

It is up to you, Minister. You have time if you wish to impassion us.

[Harriett Baldwin]

I will say something in conclusion as we have time.

I thank all hon. Members who have participated in the debate. How people access an income in retirement is an incredibly important question. It is also an issue of huge international importance. I have summarised a range of changes that have been made over the past five years. The more recent pension freedoms are major changes and it is important that we get them right, which is why the Government and the regulator will continue actively to monitor the post-reform retirement landscape closely.

[Mr Clive Betts (in the Chair)]

I was only too pleased earlier that, as I was in the Chair, I was not able to join in the competition about who was nearest to retirement age. We will move on to Mr Ian Blackford winding up briefly.

15:46

[Ian Blackford]

I thank all hon. Members who have participated this afternoon. We have had a good debate on the issues as we see them. I thank all who have contributed and expressed legitimate concerns about the consequences of the pension freedoms.

We all share the view that we need to architect a pension structure conducive to people having the best outcomes possible in their elderly years. I encourage the Government to look at the evidence of the first six months. I accept that some of the pension drawdown of the first six months was pent-up demand. None the less, as the Minister has conceded, £2.5 billion is a considerable sum to be drawn out of pension pots—50% of all the cash that was exorcised from them over that period. We have to look at that closely.

I remain concerned that pensioners will be put in a position of some financial hardship if they expose themselves fully to running down their pension pots. We accept that over the past few decades considerable moves have taken place to eradicate pensioner poverty, which we are all delighted about, and that there is little likelihood of pensioners falling below the threshold of 60% of median income, which we used to use to define relative poverty, but none the less, on the evidence from the Social Market Foundation, we can see that pensioners would fall below the 80% and perhaps even 70% income thresholds. That should concern us. It is right to continue to debate such matters and we should see if we can work together to provide more certainty and security for pensioners.

Question put and agreed to.

Resolved,

That this House has considered Government policy on guaranteed income for retirees.

15:47

Sitting suspended.