Pension Freedoms

Rachel Reeves Excerpts

Wednesday 6th July 2016 Westminster Hall

[Rachel Reeves (Leeds West) (Lab)]

I beg to move,

That this House has considered advice and guidance on pension freedoms.

I am grateful for the opportunity to have this debate on the crucial issue of advice and guidance in the world of pension freedoms. In 2014, the Government announced one of the biggest shake-ups of the pensions industry in its history. Those changes will, as the Minister knows, affect millions of people. The reforms undoubtedly give people more choice over what to do with their pension pots—one of the most important decisions on their finances—but with those choices come great risks.

At the heart of the so-called pension freedoms is the idea that people with defined contribution pensions no longer have to buy an annuity. Instead, they have an unprecedented number of choices when it comes to making financial decisions. People are suddenly being asked to make an irreversible decision by weighing up how much to save; how long they will live; how much they need to live on; the risk of investments decreasing in value; how much they will be charged by pension providers; what tax they will have to pay; and what state pension they will receive. Let us not forget, they will have to live with the decision for the rest of their lives.

The Pensions Institute’s “Independent Review of Retirement Income”, which I commissioned from Professor David Blake when I was shadow Secretary of State for Work and Pensions, warned that:

“The unifying thread that runs through funded pension scheme is the requirement to annuitise enough pension wealth, at the appropriate age, to provide an adequate lifelong income in retirement when combined with the state pension – which is the rationale for establishing a private-sector pension scheme in the first place. It is this requirement which makes a funded pension scheme different from any other type of savings scheme.

When annuitisation becomes optional, that unifying thread is no longer present and there is a real danger that the pension system begins to unravel. At best, it just becomes a tax-favoured arrangement for operating a multi-purpose spending pot and once the money has been spent for one purpose, it cannot be spent on another. At worst, it becomes a honey pot for thieves and other opportunists: while you cannot steal someone’s pension, you can steal their pension pot, as a number of people are now discovering. Lying between these extremes are millions of people who are now in control of their pension fund and who will be trying to do the best for themselves and their families…many of these people could well find themselves in the same kind of control as a yachtsman in the middle of the Atlantic in a force nine gale.”

When the pension freedoms were announced, we in the Labour party were clear that we would in principle support reform. We recognised that annuities did not work for everyone, but that reforms must be accompanied by the provision of guidance to help people to make important and difficult decisions about how to use their money. In response, the Chancellor committed to a new guarantee enforced by law that everyone retiring with defined contribution pensions would be offered free, impartial, face-to-face advice on how to get the most out of their choices. That commitment materialised to some extent—although it was guidance, not advice—in the form of Pension Wise, a single guidance service launched to coincide with the introduction of the pension freedoms in April last year.

The Pension Wise service offers face-to-face or phone appointments to those aged 50 or over with a DC pension. In each appointment, impartial guidance is given on pension options and tax and there is a discussion of the options that may be most suitable for the client. The ratings from those who have used the Pension Wise website are positive. The gov.uk performance site shows user satisfaction at 89%. I pay tribute to all those who work at Pension Wise for providing an excellent service.

However, the problem, and the reason for the debate today, is not the effectiveness of Pension Wise; it is how few people are using the service. The Financial Conduct Authority estimates that fewer than one in five consumers are using it. In response to a recent parliamentary question I tabled, the Government revealed that there have been 61,000 completed appointments since launch. That represents only around 12% of DC pension customers who have accessed their pensions since the reform came in. That is deeply troubling, and I am interested in what the Minister has to say about improving the use and take-up of the service. Put another way, almost nine out of 10 people are not seeking advice or guidance from Pension Wise when cashing in their pensions. That figure is worrying and suggests that millions of people are not getting the impartial guidance they need. If that is the case, as it seems to be, we should be alarmed about the quality of financial planning guidance that some people are getting and the subsequent impact that could have on their standard of living in retirement.

The Government published their “Financial Advice Market Review” in March and their plans for a new comprehensive pensions guidance service. They have a shared objective of ensuring that all consumers can access the help they need to make effective financial decisions. As the review says:

“Both industry and consumer groups also felt that many people, even those who did not necessarily want or need regulated advice, would benefit from more support and guidance in financial decision-making.”

In addition to those efforts to bolster the pensions guidance offering, welcome regulatory scrutiny will also be applied to the evolving retirement market, with the FCA identifying pensions as a priority area in its 2016-17 business plan. Although those are welcome developments, the results will arrive too late to benefit the 1.5 million people expected to access pension savings before spring 2018.

Critically, evidence suggests that poor outcomes are likely for consumers who do not seek professional support with their retirement options. UK and overseas analysis shows that factors such as disengagement, underestimation of how long people will live and weak financial capability lead to poor outcomes. Although it is too early to say what the new pension freedoms will mean for outcomes, the FCA estimated the losses from failing to shop around when people were required to buy an annuity:

“The majority of consumers (60%) do not switch providers when they buy an annuity, despite the fact that we estimate 80% of these consumers could get a better deal on the open market, many significantly so.

We estimate that the aggregate benefits that consumers miss out on by not shopping around and switching is the equivalent of between £115m and £230m of additional pension savings.”

The OECD has suggested that, although the pension reforms might increase pensioners’ control of their money, which I welcome, they could be

“detrimental to both retirement income adequacy and incentives to work”

because of

“myopic behaviour and insufficient financial literacy”.

What is more, research from the International Longevity Centre-UK suggests that there is limited knowledge about relevant financial products and services. Only half of those with a DC pension said they understood what an annuity is “quite” or “very well”. Just one third said they understood what a joint life annuity is quite or very well. Most shocking of all, just 3% said they understood what income drawdown is quite or very well. These are people in DC schemes who have to make big decisions, yet they do not seem to have the knowledge about the products they have to choose between.

Research by the Pensions and Lifetime Savings Association found that 53% of people incorrectly believe drawdown products offer a guaranteed income. The majority of people believe that a drawdown product is a guaranteed income, which it most definitely is not, while one quarter believe that drawdown carries no investment risk at all, which is incredibly worrying.

Meanwhile, the Pensions Institute’s “Independent Review of Retirement Income” states:

“It is important to be aware of the risks involved in the generation of retirement income from pension savings”—

such as investment risk, inflation risk and longevity risk. It continues:

“Following ‘freedom and choice’, these risks are now borne directly by DC scheme members”

in a way that they were not when everyone had to annuitise. It continues:

“Even with improved financial education, it is unlikely that many people will fully understand some of these risks. This is because some risks have to be experienced before they can be genuinely understood, and often it is too late by that stage to do anything about them. In addition, many people will have problems understanding the full range of product choices that are now available. All this makes it difficult for many people to be in a position to make ‘informed’ choices.”

Demand-side weaknesses and lack of knowledge from people making decisions are compounded by the repeated failure of parts of the pensions industry to, in my view, treat customers fairly. Mis-selling in the UK retirement market has been catalogued at length by the FCA and its predecessor, the Financial Services Authority. Poor buying decisions have also been identified by some organisations and consumer groups to the National Audit Office, which in its report on mis-selling described the concerns as being centred on regulatory approaches that are

“based too much on monitoring and implementing detailed disclosure requirements, rather than assessing whether consumers truly understand what they are buying.”

If disengagement and low take-up of guidance remain the norm, it reduces competition and undermines confidence in the new pensions market. Again, I stress that this is a real concern when we have consumers without the information to make the best decisions, and a pensions industry that is not necessarily helping people to make the decisions that are best for them.

Pension Wise has run three national marketing campaigns across TV, radio, print and digital media, but take-up, as I said earlier, remains low at just over 10%. Such problems must be addressed. That is why I call on the Government to issue new guidance to make sure consumers seek proper guidance before drawing on their pension pots. At the moment, the so-called wake-up packs sent to DC pension customers ahead of retirement are often more successful in driving consumers to the providers’ own product solutions than directing people to the Pension Wise guidance service, something that Baroness Altman has pointed out:

“I have seen the retirement packs from some of the better pension providers who are hiding away Pension Wise. They are doing this while promoting their own internal help lines.”

The whole point of Pension Wise is to be readily available to the people who are making the decisions, but they are not directed there by their pension providers and will probably never find out about it. So what is needed is a new approach whereby customers who decide to cash in their pensions must either seek guidance from Pension Wise or actively opt out of doing so before progressing. That would not only improve outcomes for customers, but dramatically reduce the opportunities for mis-selling, cut the risk of savers falling foul of financial scams and other potential abuses, and help people to make the right decisions at such an important time in their lives. It would enable guiders to alert consumers to the existence of fraudsters who use techniques such as cold calls and text messages to con people into placing their savings into wholly inappropriate investments. The Government must take a number of additional actions to support that.

The Government must work with industry to introduce a system to allow pension providers to book guidance appointments directly for their customers, or to put them through, if they can make contact by phone, to the appointment booking service without a break in service. Such handovers should be based on ensuring that the customer journey is as smooth and continuous as possible and that as many people as possible get the right guidance. The Government should consider allowing providers to share certain data with each other, so that when a customer is passed from one service to another, the second engagement does not need to start from scratch, with the customer forced to repeat all the information that they had previously provided.

Looking further forward, the new pensions guidance body should also link with the pensions dashboard being developed by 2019. The dashboard will enable people to see all their pension savings in one place—that is welcome—help people to engage with retirement planning and prompt them to take action. It is critical, therefore, that there is co-ordination with the new guidance body, so that consumers are signposted and directed to access guidance when looking at their dashboard. Links to the guidance service should be embedded within the pensions dashboard from the start, and the Government should consider how to improve engagement as the dashboard is introduced. That will also encourage consumers to seek pensions guidance at an earlier stage.

Currently, people are prompted to seek guidance at the point of, or close to, making a decision on how to turn their pension savings into a retirement income—for example, when receiving a wake-up pack from their provider. Proactively contacting people at an earlier stage in their working lives would also give people more time to make changes to their savings strategies if needed. As with other measures to improve the customer journey, solutions should be tested with consumers to ensure that they are effective and meet their needs. Although I believe all this is critical, we must not take our eye off the bigger picture. The Blake review makes excellent recommendations for the direction of pension reform, and that should be the focus of future Government policy making.

In conclusion, failure to address low guidance take-up is likely to lead to negative outcomes for those most at risk of making poor choices, reducing pensioner wellbeing, undermining competition in the retirement market, and having a toxic impact on confidence in the pension system just when good progress is being made through the roll-out of automatic enrolment. The guidance structure is already in place in the form of Pension Wise, which has received positive feedback, as I set out earlier, from those who have used it; it has the scale and budget to deliver guidance to the full range of consumers who need it. But without action from the Government, take-up looks set to remain low. That is why I am calling on the Government to introduce the default guidance approach. Crucially, that would in no way undermine or inhibit the central purpose of the pension freedoms. Consumers would retain complete freedom to draw down as much or as little of their pension pot as they wish at any time they want.

That change would provide a vital safeguard for millions of people when they plan for their retirement. It would give them the security of knowing they have had the benefit of impartial guidance before making a decision that could have a huge impact on how comfortable they will be in retirement. It would have a dramatic impact in helping people to use their pension pots, which they have saved for, wisely. I urge the Government to take that on board to help to ensure that as many people as possible can enjoy a secure income in their retirement.