Guaranteed Income for Retirees

Jim Cunningham Excerpts

Tuesday 17th November 2015 Westminster Hall

[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.

--- Later in debate ---

[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.