Draft Pension Schemes Act 2015 (Transitional Provisions and Appropriate Independent Advice) (Amendment No. 2) Regulations 2017

Alex Cunningham Excerpts

Wednesday 29th November 2017 General Committees

[Alex Cunningham (Stockton North) (Lab)]

Good morning, Mr Stringer; it is a pleasure to serve under your chairmanship.

We agree that the regulations are designed to help people, and we will not oppose them. I have a number of comments and questions, but I do not expect or intend to detain the Committee very long. As the Minister said, the regulations have been introduced to provide protections for people at a time of real financial difficulty for millions of people in our country. Wages are down in real terms, millions are using food banks and thousands of families with children will be homeless this Christmas. The average household budget had unsecured debts amounting to £13,200 at the end of 2016, just below the £13,300 level at the end of 2008, on the eve of the financial crisis.

Analysts at the Trades Union Congress expect that figure to rise to £13,900 by the end of this year and as high as £15,400 by the end of 2021. Nobody should be surprised at people choosing to take lump sums of tax-free money from their pensions because they simply do not have the luxury of being able to plan ahead and look to the future. Their worries are very much in the present. While I recognise that it is important that people with even small benefits with guaranteed annuity rates should receive advice, I cannot say that I do not understand why some people are choosing the option to have their money now.

Pension freedoms are a success to some extent, but people are seduced by the temptation of easy cash for a number of reasons related to their personal circumstances. Here lies the contradiction and unintended consequence of pension freedoms: it is incentivising jam today and may end up leaving little for retirement. One of my biggest questions and concerns is why that was not considered when the 2015 Act was passed. Why is it only now, after two years, when numerous people have taken out lump sums, that the Government have decided it needs to be addressed?

Nevertheless, the decision is still welcome. Advice should be given, and it should be good-quality advice at the lowest possible cost. We must have financial advisers who consider the future of their clients, and provide a real picture of what they can expect. There seems to be an attitude that small safeguarded benefits do not matter as much, when I would argue that they are in fact just as important as any others, if not more so. Any guarantee of a future steady income outweighs the high risk involved in managing one’s own pension pot.

People with less than £30,000 may be poorer, facing increased financial difficulty and looking for a way to resolve their problems quickly. They may insist on having their tax-free 25% quickly, but I wonder about the quality of advice that they are getting. They need to know that their guaranteed annuity rates are worth more than cashing in. That is why I welcome any initiative that would require them to receive advice before making any transfers. I look forward to making many similar points when the Financial Guidance and Claims Bill comes to the Commons; I assume that that will be in 2018. I would also argue that the people who have benefits under £30,000 are the people who most need the advice.

That said, while I appreciate that there are concerns about the cost of the advice from Financial Conduct Authority-regulated providers, I do not believe that should be a barrier, nor just an entitlement for the wealthier. As I have said, the change is welcome, but would the Minister agree that for many people the horse has already bolted? They have had their cash, they have spent it and many of them face financial hardship simply because nobody warned them of the risk they were taking. The freedom agenda has been littered with bad advice. Not everyone is being reasonably and accurately informed about their options, and they are missing the key point that taking the cash would not be as valuable as keeping their pension benefits.

I note that the Government have received representations from schemes and consumer bodies that the current approach is confusing for members, which does not surprise me at all. The Minister has addressed that. I have spoken on the issue of transparency a number of times, and will continue to do so until I am satisfied that there is a real and meaningful clarity provided to those who have occupational and private pensions. Any confusion faced by consumers simply proves my point. We cannot just provide information that is difficult to understand: it needs to be in language that is easily comprehended.

I note that a voluntary approach has been considered but discounted on the grounds that providers would not always comply with a requirement to notify individuals about their guaranteed annuity rates, as it would be a cost to the provider. It is right that there is a requirement for providers to give personalised risk warnings to all members with guaranteed annuity rates, and that they seek advice. I hope that this is another a step forward to cleaning up and making this area more transparent and worth while for consumers.

We all know that when it comes to the financial services industry, at times there are those who do not always act in the client’s best interest. The Financial Conduct Authority is looking into claims that rogue pension advisers are aggressively targeting steelworkers at Tata’s UK plant in Port Talbot. It is a real concern for everybody that advisers have swooped on the steelworkers, in many cases seeking to persuade them to transfer their money to alternative arrangements. While these transfers may enable the steelworkers to access their savings more easily, they invariably carry high costs and almost always involve schemes that carry much greater levels of risk. Despite Government assurances, rogue advisers are reportedly presenting a transfer as the best option for almost all those affected, despite regulators repeatedly warning that most people with defined benefit pension benefits would be better off keeping them.

What will the Government do through the regulator to ensure that we do not see the same thing happen to people who have guaranteed annuity rates savings? I have mentioned the cost of advice. How will the regulator ensure that advisers do not charge excessive fees for advice, which is something that could dig deep into small pots? Likewise, how will they make sure that the rogues in the system do not make a financial killing as a result of these regulations and the new body of people seeking advice?