Guaranteed Income for Retirees

Mhairi Black Excerpts

Tuesday 17th November 2015 Westminster Hall

[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.