Pensions Guidance and Advice

Matt Rodda Excerpts

Tuesday 1st March 2022 Westminster Hall

[Nigel Mills]

It is not the Minister’s fault on this occasion.

I do not think the main topic that I am proposing today is one that divides us. I think we would all accept that the problem is that we have a hugely complex pension system. Most people do not really have any understanding of how it works or what their options are, and far too few end up receiving advice or guidance before taking difficult decisions, having probably saved for 30, 40 or more years. They get to the end point and, sadly, do not always understand what they are doing. The huge risk of that situation is that they make a terrible mistake that they could have avoided, which has a detrimental impact on their retirement and reduces their quality of life in their last few years. The real question is what we can do to improve that situation.

We are not here today to talk about the level of pension saving, which is a hugely important topic but one for a different day. We are talking about what we can do to help people who get to the end of their saving journey to get the outcome that they want—the best outcome that they can have with the money that they have. I am not here to criticise auto-enrolment, which has been a huge success. It has hugely improved the situation for many people in work and at least gives them something to worry about when they get to retirement, whereas that would not have been a problem a decade ago. Millions of people would not even have had a pension pot to be thinking about.

Equally, I am not here to criticise the pension freedoms reforms that took place almost exactly seven years ago, which have been a huge success and are hugely welcome. In its recent report, the Works and Pensions Committee accepted that they should stay in place. However, we have to accept that we have a contradiction between the two systems and that we have chosen a way to get people to save pensions by almost tricking them into it, so that they do not realise. They just get defaulted in and do not have to engage, although we wish they would. At the end of that, we now have a hugely complicated system with lots of choices that people are not prepared for, and we need to find a way to prepare them for that, either at some point in their saving journey or when they get to retirement.

This is a problem that is actually getting worse. Statistics show that fewer people than before have taken advice over the last years, and the problem is getting worse because we have more and more people reaching retirement who will not have any defined benefit pension that can provide the majority of their retirement income. In order to ensure their quality of life in retirement, more and more people will be relying on their defined contribution savings and on the decision they make when they hit the age of 50 and get the chance to take a lump sum. It looks like a hugely attractive way to solve their present financial woes, but they do not realise that it makes their future woes a lot worse, having lost a quarter of what they had, which probably was not enough in the first place.

During the pandemic, a lot more working people over a certain age have now decided that they actually quite like being furloughed and have wondered whether they can eke out their retirement savings over a longer period by using the lump sum and not going back to work. It may be a terribly bad decision that they are making. I think the Government are now waking up to the fact that we have lost hundreds of thousands of people from the workforce who could come back but who would quite like not to do so. I am sure we would all like to be able to afford to retire early, but not if that gives us huge financial problems in later life.

[Matt Rodda (Reading East) (Lab)]

I am grateful for the hon. Gentleman’s comments about the importance of pension savings and for his very serious approach to this issue. Does he agree that there is a contradiction here with what the Prime Minister has said about the growth in employment? He may have been somewhat mistaken and inadvertently given a misleading impression that the number of staff on payrolls has increased, but the overall size of the workforce has dropped, as the hon. Gentleman mentioned.

[Nigel Mills]

Yes, I think that is right: employment has grown, but participation has reduced. I have spent many years arguing about whether people are in fake self-employment—not really self-employed but being made to be, or pretending to be, because their employers are being unscrupulous or trying to get a tax advantage. Shifting people who were not really self-employed into thinking that they are employed is quite a good outcome—it makes the data more reasonable. The hon. Gentleman is right: we have lost hundreds of thousands of people who could still be working. When there is a workforce shortage, any measure that could get people from those cohorts back into work would probably be good for the majority of them and for the economy as a whole.

To return to today’s topic, Her Majesty’s Revenue and Customs data tells us that £45 billion was taken from pension pots in the first six years of the pension freedoms policy. Some 3.7 million defined-contribution pensions were accessed in that period, and over 2 million of those pots were cashed in full. This is not a problem for the future when defined-benefit pensions start to run off. It is a situation we have seen over the first five years of pension freedoms. It is happening now. Hundreds of thousands of people are accessing their pension pots without knowing what they are really trying to do.

It is worth quickly noting that we still have a problem with the data. The data that we have shows pots being accessed, not pots being accessed by individuals. We do not know whether the data shows one individual accessing 15 different pension pots from 15 different jobs, or 15 different individuals accessing one pension pot each. If we are to have a proper understanding of the situation, we need better data, so that we know what people are doing and what outcomes they are facing. We raised that as a Select Committee on multiple occasions, but we still cannot seem to get that data to be gathered.

The reason for asking for this debate—and what I would quite like the Minister to recognise when he wraps up—is that we have a large problem here. I am sure that the Minister does recognise that; he has said so on many occasions. I would also like the Minister to set out a direction of travel for the regulators and industry. We know that the take-up of pension advice and guidance is far too low—I will come on to the data in a little while. The Minister has made some welcome steps, which will come into force in a few months’ time, but even those steps will not fix the problem or take us to anything like the level that we need. I know that we do not like targets or benchmarks, but perhaps the Government could set an aspiration, an indication of what good practice is, or what the level should be. We need to set an aspiration for the regulators as to what the level of take-up of advice and guidance should be, and we need a plan for how we get there. I will talk through a few ideas about how we could bridge that gap.

If Parliament does not set the regulators a target, benchmark or aspiration—call it what you will—they will flounder, flap around and go round in circles. We need to be clear: “Here is where you need to get to, and here is how long you have to get there; if you do not get there, we will have to take some different measures of our own.” We had a problem during the debate on the Pension Schemes Bill last year or the year before. Amendments were tabled that called for various solutions, and the fact that they were not adopted means that people think that Parliament does not actually want them, whereas that is not how parliamentary debates work. We move amendments to float ideas, and we debate them. The fact that they are not voted on does not mean that we did not want them; it just means that we think that there may be other ways to achieve them. I hope that we can send a strong message today.

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[Emma Hardy (Kingston upon Hull West and Hessle) (Lab)]

It is a pleasure to serve under your chairmanship, Ms Bardell. I will not repeat the excellent points made by the hon. Member for Amber Valley (Nigel Mills), but I echo many of them. The need for good pensions advice is real and pressing. Nobody jumps out of bed in the morning wanting to think about their pension—apart from everyone here, of course, who did that this morning. It is not top on their list of priorities, but it really matters.

Pensions advice matters more as we see the impact of the increased cost of living. More pensioners are falling into poverty and having to choose between heating and eating. The need for an adequate pension is even more pressing. My interest in this debate comes primarily from my role on the Treasury Committee, where I have taken a particular interest in this subject. In my intervention on the hon. Member for Amber Valley, I referred to the letter from the Financial Conduct Authority to the Chair of the Select Committee of 16 February about what a stronger nudge could be, and about trials to improve take-up of impartial pensions advice. My only criticism was the sense of a lack of urgency. There was a lot of, “Well, we are still in the design phase,” “We could try this,” and “We could try that.” There was nothing concrete.

One point that I would love the Minister to take away is that we need to push the FCA and say, “We want you to firm this up. What exactly will you do? When will these trials take place? When will you have a deadline for designing them?” It feels as though they are using warm words but not taking concrete action.

Obviously, pension decisions are complex, even for the well-informed saver. I have heard that many of us will end up with four or five pensions before we reach retirement, and people are having to try to work out the best advice when they are dealing with these many different pension pots. Gone are the days when people stayed in one career all their life and then retired. This added complexity really matters. I did a Facebook Live session on the subject and, believe it or not, members of the public did engage and were quite interested in the issue. They were particularly interested in how they find out where their missing pension pots were. That was another question that came up, which shows that people do not truly understand this subject.

As I mentioned in my intervention, the lack of high-quality advice leads to people being defrauded, which is heartbreaking. They are not just receiving poor pensions advice; they are being tricked and defrauded. That makes getting impartial advice even more important. We can say to people, “Don’t listen to these charlatans who are trying to steal your pensions. Go to this impartial advice service.” I truly do not think many people know that it is there. The feedback from people who use it is that it is a very positive service that gives really good advice. It makes people feel more informed about how to make their decisions. The difficulty, of course, is that if someone does not know the service is there, they will not go to it for advice, and then they are much more vulnerable to making poor decisions.

I want to mention issues that I will talk a lot about in future: the poverty premium and the hidden costs of poverty, and financial inclusion. It is relevant to mention them in this debate on workplace pensions because the Financial Inclusion Commission estimated in January last year that around 8.5 million workers were excluded from automatic enrolment in workplace pensions because they worked in the gig economy, were part time, and earned too little. Those workers tend to rent their homes,

“and will have little in the way of savings or other assets to draw on in retirement…In addition, employees who are eligible for automatic enrolment may not engage because they…don’t feel they can afford to make contributions out of their income”.

That is another of my concerns. I am hearing from residents who are choosing to opt out of pension contributions because of the cost of living. They do not feel they can afford things day to day, so they do not want to continue making pension contributions, and that is a huge worry that brings to the forefront the fact that everybody needs advice when making such decisions.

Nurses tell me that they are opting out of their pensions. I have tried desperately to convince them that the NHS pension is great, and have asked them to please stay in it, but people are deciding to opt out right now. Partly, they do not fully understand the consequences of the decisions that they are making today. That is why we need to ensure that there is excellent advice. I see that my right hon. Friend the Member for East Ham (Stephen Timms), the Chair of the Work and Pensions Committee, is here, so I will not go into the detail of the Committee’s recommendations.

[Matt Rodda]

It is good to see you in your place, Ms Bardell. My hon. Friend is making an excellent point about the very real difficulties facing so many families. Does she agree that she is, in part, referring to the wider cost of living crisis and its worrying knock-on effects on many, many families? They feel forced to make these terrible decisions because they are struggling to get to the end of the week as a result of rising heating and fuel bills.

[Emma Hardy]

My hon. Friend is absolutely right. The message that we would like to get to those who are making savings is: “Do not do it by not contributing to a pension, because you will need that money in future.” That is why we need important, impartial advice.

I am not a pensions specialist. I am just somebody with a keen interest in the subject because I see what happens to too many people when they go into retirement without the pensions that they need, and I see what happens when people are given poor advice and are defrauded. People just do not understand. They choose to take the lump sum today, not realising it pushes them into a higher tax bracket, and not realising the consequences for their future income. They just do not fully understand all the decisions. I truly believe that if we give people better advice, they will make decisions that mean we will, hopefully, have fewer people in poverty in future.

As I said, I was disappointed by what the FCA said in evidence to the Treasury Committee. We need the firm and clear message from the Government that they will get on with the trials. They should not spend any more time messing around with them. That is a priority; it would help get the situation moving more quickly.

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[Matt Rodda (Reading East) (Lab)]

It is a pleasure to serve under your chairship, Ms Bardell. I pay tribute to the hon. Member for Amber Valley (Nigel Mills) for what I thought was a very thoughtful and knowledgeable speech, which has left us all with a great deal of food for thought.

I also thank the Chair of the Select Committee, my right hon. Friend the Member for East Ham (Stephen Timms), and Members across the House, in particular my hon. Friend the Member for Kingston upon Hull West and Hessle (Emma Hardy) and the hon. Members for Strangford (Jim Shannon), for Kilmarnock and Loudoun (Alan Brown) and for Glasgow South West (Chris Stephens). In addition, the hon. Member for Grantham and Stamford (Gareth Davies)—I beg his pardon—spoke with great knowledge of the sector; I appreciate his detailed explanation.

I do not want to completely rehash or repeat points that have been made by colleagues, but I want to focus the Minister and ask him for a response on one or two very important things. First, however, we should acknowledge, seven years on from their introduction, that while increased pension freedoms have brought greater flexibility, they have also resulted in a potentially greater degree of risk. Although advice services such as Pension Wise have played an important role in making advice more available, the service’s own figures show that just 14% of savers are accessing that advice. That really is not good enough.

Clearly, most people will make a decision about their pension—a decision of this scale—only once in their lives, so it is staggering that only 14% of people are receiving appropriate advice from Pension Wise. Imagine if only 14% of people were seeking advice for any other major financial decision—obviously, alarm bells would be ringing in Ministers’ offices and across the relevant sector. We have to reflect on that, so I hope that the Minister will try to address some of the thoughtful and well-made points raised by the hon. Member for Amber Valley and others.

I also want to draw the Minister’s attention to the fact that the same points have been raised by a number of other voices outside of the House today, so I hope he will go into this issue in some detail. I hope, in particular, that he will address the point made by the hon. Member for Amber Valley that many of the people who are not seeking advice have smaller pension pots and possibly less financial experience, and may need a greater degree of support, while those seeking advice appear to have larger pension pots and, arguably, may have a bit more financial experience. That seems to be the wrong way around.

I hope that Government policy can focus on that and, in particular, that they will look at some of the behavioural points—the nudges—and ways that they may legitimately assist people in this important matter. The Chair of the Select Committee also raised some interesting and thoughtful points on the issue of the potential trial service. I hope the Minister will comment on those.

I appreciate that time is limited, so I want to draw the Minister’s attention to another key area; I hope he will update the House on what the Government intend to do on this matter. The flip side of the lack of advice is the very sad and quite worrying growth in the number of scams; it is interesting that the two things have happened at the same time. While organisations such as Age UK have produced guidance to support those who may be vulnerable, it is really the role of Government to do much more on this important issue. Again, as with the issue of the lack of advice, the question of scams has been highlighted by the official Opposition, the Work and Pensions Committee, former Ministers and other respected figures such as Martin Lewis.

The pensions industry estimates that more than 40,000 people may have been cheated out of £10 billion-worth of pensions savings since freedoms were introduced in 2015. Action Fraud has reported that pension scams are becoming one of the UK’s most common types of fraud. These scams are often harder to spot than expected, even for those with good IT or tech skills. Research by Citizens Advice showed that one in eight people who said they were confident with technology found it difficult to spot a scam. However, it is possible to take action against that sort of fraud; as the Minister knows well from his involvement in the passage of the Pension Schemes Act 2021, the Government have taken action on telephone fraud, which is a related type of scam.

[Jim Shannon]

The hon. Gentleman is absolutely right. If someone is approached by a person with a scheme to improve their pension that looks too good, it probably is too good. Be careful—if someone promises you the world, the stars and the moon, there is something wrong.

[Matt Rodda]

The hon. Gentleman makes an excellent point; we do need to apply common sense to these very important matters. As I was saying, the Pension Schemes Act made it illegal to cold call and offer advice, in an attempt to reduce the number of telephone scams. Obviously, there are other forms of scams.

[Emma Hardy]

My hon. Friend is making an excellent speech. I think everyone would accept that the sophistication of the fraudsters is developing day by day, and that both legislation, and police and the Government action, is playing catch up—as it always will. Therefore, there is an urgency to deal with this; while the Government might have dealt with the telephone matter, scams are now more likely to be online or via other avenues. We need to make this a priority.

[Matt Rodda]

My hon. Friend is absolutely right that, sadly, technology and the ability of fraudsters is racing ahead. We need to take far more urgent action to tackle these awful problems. In fact, she has anticipated my next point; I hope that the Minister will clarify the Government’s position on this. I understand that he may be interested in the possibility of this action being included in the Online Safety Bill, and I ask him to update us on the discussions he has had with his colleagues. That Bill offers all sorts of possibilities to tackle these dreadful frauds. I hope that the Government will take determined action to tackle those problems, given that they have legislation that could address them in an appropriate and timely manner.

I will briefly mention some concerns about the roll-out of the dashboard and one or two other tools. Like Members across the House, I welcome the Government’s approach in attempting to devise the dashboard, and I recognise the need for greater information, but I understand from speaking to the industry that there are a series of technical problems. We should not let those delay the process too much. I ask the Government to take on board the industry’s views on that, and to be careful to ensure, as it is rolled out, that the dashboard is robust. I see that the Minister is nodding; I am sure that he will want to elaborate on that. It is important not only to achieve the dashboard, but to make sure that it is a high-quality product that offers the hoped-for level of reassurance and advice.

It is fair to say that the Government are taking rather small steps in the right direction, but they need to do so much more on the issue of advice. I hope that the Minister will elaborate on those points and reassure us that he is addressing this issue with the level of energy that is needed.