Pension Schemes Bill

Baroness Drake Excerpts

Tuesday 27th January 2015 Lords Chamber

[Lord Bourne of Aberystwyth (Con)]

I thank the noble Lord, Lord Bradley, for his contribution and recognise that “decumulation” might be jargonistic—I am sure that I have used jargon myself—but “rip-off” certainly is not, and I think we agree that we do not want rip-off charges. The Government are as much against them as the Opposition, I am sure. I will do my best to answer the specific points that the noble Lord raised.

This amendment was tabled by the noble Lords, Lord Bradley and Lord McAvoy, also in Committee earlier this month, so noble Lords will forgive me if I have dealt with some of this previously. As I mentioned on that occasion, the Government take the issue of charges on pension products very seriously and are committed to taking action where there is evidence of consumer detriment. I can reassure the noble Lord on that point.

I am pleased to be able to say that the Government have powers under the Pensions Act 2014—specifically, Section 43 and Schedule 18 confer them—to limit or ban charges borne by members of any pension scheme, including any new flexi-access draw-down funds, if this proves necessary to protect consumers.

Similarly, the Financial Conduct Authority has wide-ranging product intervention powers, including the ability to cap charges on flexi-access draw-down funds. These existing powers cover all the institutions that could offer such draw-down arrangements.

Flexible draw-down is a relatively niche product, aimed primarily at those savers with large pension pots. HMRC data from the start of 2014 showed that only 5,000 people per year have entered flexible draw-down, which has been in place since 2011. Flexible draw- down is clearly not currently a mass-market product.

With the introduction of the new flexibilities from April of this year, we expect this to change. We have given the industry a great deal of flexibility to develop a range of more flexible retirement income products and offer consumers greater choice. We want to see a vibrant and competitive marketplace, bringing forward products that meet consumers’ needs and enable consumers to make reasoned choices. The Government believe that a competitive market is the best way to ensure that products are well priced and we expect the expansion in take-up of draw-down products to exert a downward pressure on charges. Moreover, as scheme members can withdraw variable amounts, draw-down products generally require more administrative activity than accumulation-phase products. With the introduction of the new pension flexibilities, none of us can be absolutely certain how this market will develop. This was a point made quite fairly by both the noble Lord, Lord Bradley, and the noble Baroness, Lady Drake, in Committee.

Imposing a charge cap on draw-down at this stage, before we have seen the charges on the new products that are currently under development, could therefore risk setting a new norm and arrest any reduction in charge levels, or set a charge that is too low to be deliverable and stifle the draw-down market altogether. We therefore need to monitor how this market develops from April to gather further evidence about average charge levels before making any decision on what would be an acceptable charge level. The Government and regulators are therefore monitoring the development of new retirement income products, including the next generation of draw-down products, very closely.

Innovation and flexibility in the retirement income market must, of course, be for the benefit of consumers, not at their cost. The Government welcome the FCA’s commitment in its recent policy statement that it will commence a full review of its rules in relation to the retirement income market in the first half of this year. If these measures reveal evidence of sharp practice—rip-off charges, in the noble Lord’s phraseology—the Government and the FCA have the powers to act quickly to protect consumers. Along with the Financial Conduct Authority, we are also legislating to require reporting of charges and information on transaction costs by trustees and independent governance committees respectively of all workplace pension schemes from April this year. We are also committed to consulting further in 2015 on the transparency of additional costs and charges, to enable comparability across schemes; we will be considering draw-down funds as part of this work programme. We covered some of these transparency issues in Committee.

[Baroness Drake (Lab)]

The Minister made the point that I had not heard before that, from April 2015, the independent governance committees will be invited to report on draw-down products, which is to be welcomed. Could he clarify whether the full remit of the independent governance committees will apply to draw-down products, or is it just a question of reporting?

[Lord Bourne of Aberystwyth]

As I understand it, it would certainly cover the point that the noble Baroness makes about draw-down products; it will not simply be a question of reporting.

To conclude, while the Government share the concerns about member-borne charges, the Government and regulators are equipped with the powers to cap charges in all pension schemes, including draw-down products. We feel that intervening in the market at this stage would be wrong: intervention must be based on evidence, but it is an intervention that the Government have not shied away from making elsewhere in the market. We are closely and proactively monitoring developments in the decumulation market to consider whether there is need to use those powers.

In the closing remarks of the noble Lord, Lord Bradley, in Committee, he stated his hope that we would act in the interests of consumers if we were to see excessive charges in the new draw-down products that come to market. I can reassure him that this remains our intention. I therefore respectfully ask the noble Lord to withdraw his amendment.

--- Later in debate ---

This is a complete mess, and frankly, the Government should be embarrassed. They are tearing up the rulebook on the treatment of capital within DWP by tearing up the rulebook on access to pensions in HMRC. Once the Government have finally got their head clear, when we may have some consistent policy between DWP and HMRC, may we hope that that same luminous clarity will be conveyed in guidance to those millions who may be affected to their detriment and who do not know what to do? That guidance is essential. I beg to move.

[Baroness Drake]

My Lords, this amendment addresses the need for the Government to make savers aware of the interplay between pension freedoms, entitlement to income-related benefits and assessment for care and support. Pension reforms give rise to a significant risk that those with modest incomes will be overtaxed when they take cash out of their pensions—a concern shared by the FCA, the Pensions Policy Institute and the International Longevity Centre.

In the face of complexity, people get security from taking cash and putting it in the bank. They may not understand that that could result in their facing a significant tax bill, generating less income for their retirement. However, that is not the end of it. Savers accessing the cash from age 55 may not understand the risk of depriving themselves of income-related benefits. Some savers therefore risk both moving into a higher tax band than normal and paying unnecessary income tax, and losing benefit income because cash in the bank means loss of entitlement to benefits.

For pension savers below the state pension age who are claiming income-related benefits, the DWP will not take into account their pension savings if they do not access them. Once they do, however, the funds accessed will be treated as income, such as an annuity, or capital, depending on how they take them; the rules are different. Savers receiving benefits—such as housing benefit, council tax deductions, income support and income-based jobseeker’s allowance—could therefore experience benefit loss if they take significant cash out of their pension pot. For example, and as my noble friend explained, under current rules, anyone below state pension age with capital below £16,000 can apply for housing benefit. When an individual’s wealth goes above £6,000, they will start to see a reduction in benefit, and once it reaches over £16,000 it will stop completely. Reductions in council tax operate on a similar principle.

For pension savers above the state pension age, under the new freedoms, as now, pension savings are taken into account when assessing entitlement to benefits —whether or not the saver has accessed them. Defined contribution pots are given a notional income, or the actual income taken from the pension pot is used. Under the new freedoms, a saver, through income draw-down, can keep varying the amount of cash that they draw down. As it is not a single decision, will people have to report every time they access their savings?

If the saver takes all of their pension pot in cash—not to behave irresponsibly but to put it on deposit in their building society—they might meet a loss of entitlement to benefit. The noble Lord, Lord Newby, in his letter to my noble friend Lady Hollis, states:

“We believe that people should use their funds responsibly if the alternative to doing so is claiming income-related benefits”.

I completely agree with that sentiment. However, that message has not been communicated clearly to people on income-related benefits or to those who are potentially on those benefits. It has been lost in the “Your Money, Your Choice” promotion. Pension savers who take the cash and put it on deposit may not believe that they are behaving irresponsibly. As Martin Wheatley of the FCA observed: when faced with complexity, people prevaricate. If the simple option of just taking the money and putting it in their bank is given to them, they may just make that snap judgment.

Where savers take the cash and go on a spending spree, they risk being caught by the “deliberate deprivation of assets” rule, which is meant to stop benefit abuse. I will paint a scenario. Complexity and behavioural bias push people towards taking cash. They are overtaxed and the value of their savings falls. The cash, put responsibly in the bank, results in a loss of benefit income so the real value of their savings falls further. If they spend their capital too aggressively they could be caught by the deliberate deprivation of assets rule. One could say that it was their freedom of choice: they made the mistake and took the cash and put it in the building society; or they blew it, so they should not be allowed to fall back on the state. However, we should at least make sure that people understand that. I am pretty confident that most people out there do not have a clue on the interface between the benefit system and the pensions freedom. If the Government want them to make an informed choice, they are entitled to and need to know.

How does one police the new arrangements? Does the DWP have the capacity to keep track of how pension cash has been spent? Will providers have to keep records of savers’ behaviour, and for how long? What if someone takes their savings in cash in their 50s, when working, and there is a long gap between taking it, spending it and seeking benefits? What evidence will be used for determining deliberate deprivation? Will it include taking too many cruises? The Government’s policy and rules need to be clear and people need to have clear information so they can take informed decisions. I do not demur from the sentiment explained by the noble Lord, Lord Newby, but at least allow people to understand how they discharge responsible behaviour.

There is also a lack of clarity on how the Government’s pension freedoms are intended to complement their policy on the provision of care and support. I have not seen any analysis that has worked through the subtleties of that interplay. Rather, as the noble Baroness, Lady Jolly, confirmed in her letter to my noble friend Lord Hunt, the Government’s view is that the impact on care and support in the longer term is difficult to assess, because it is difficult to predict how people will behave under the new freedoms. The Government have therefore chosen a practical response on how people will contribute to the cost of care. In essence, people will be charged and assessed on the basis of their assets at the point of needing care. Cash taken from pension pots is an asset to be taken fully into account. If a saver has an annuity, that income will be taken into account. If the saver has not accessed their funds, a notional income will be calculated. These are complexities which have to be explained to the saver who is looking to make an informed decision. On the one hand, if people take all their pension fund in cash and put it in a savings account, it could be utilised more quickly when paying for care. On the other hand, if people do not take an annuity and spend their pension cash quickly, they will make less of a contribution to the funding of social care costs. This presumably has policy implications for any Government.

How will access to cash from income draw-down products be monitored or required to be taken? If draw-down is to be treated as income, could you take such a little tiny bit that you protect your pension assets and have a minimal amount taken into account? I do not have a clue and I am sure most people do not either. Will the rules require you to take a certain amount from your income draw-down product when you are being assessed for care support? I do not want to get into debate on government policy, but people need clear information on what the policy and rules are so that they can make informed decisions.