Select Committee on Work and Pensions Fourth Report


419. Professor Nicholas Barr, London School of Economics, argued that an area in which the Commission might have done more was "public education" to help people understand what the issues are in pension reform.[514] At an individual level, people need to be equipped to take appropriate decisions. The DWP noted that "more than half the UK population have a self-reported knowledge of pensions that is patchy or amounts to little or nothing."[515]

420. David Miles, Managing Director and Chief UK Economist at Morgan Stanley and visiting Professor of Financial Economics, Imperial College, University of London, expressed some optimism about what could be achieved, pointing to experience of an initiative on the Financial Services Authority's website called "Mortgages Laid Bare":[516]

    "which tries to cut through most of the jargon and give people the kind of information that they need to make decisions about mortgages. The number of people who have hit this website is astonishing […] I am more optimistic about the ability of a concerted effort by the public sector - and I think of the FSA as part of the public sector- to improve financial literacy in the UK."

421. Others, while arguing that there was potential to do more in this area, also cautioned against over-optimistic expectations. Alison O'Connell, Director of the Pensions Policy Institute, said:[517]

    "There is room to do a lot better, in terms of giving individuals more information and helping them to make financial decisions in a more informed way, but it is very difficult to find evidence that spending a lot more on financial education will lead to better decisions. In other words, people will always make what appears to be the economically irrational decision because financial decisions are made for a whole host of psychological and seemingly irrational reasons. While improving financial education would clearly be a good thing, it is very difficult to say how far actually that would improve outcomes."

422. This sense of the limitations of information and financial education was one of the reasons some witnesses gave for pressing for simple pension solutions. Professor Nicholas Barr said he thought that "having something which is fairly easily explained to people is helpful to public policy [...] the simpler the saving schemes the easier it is for them to act in ways that are rational and in their own self-interest." [518]

423. He, along with others, supported the introduction of mechanisms, such as auto-enrolment which created "a very strong steer" and nudged "people who are not well informed to do what experts think they ought to do and what, deep down, most of them know they ought to do."[519] He suggested that there were risks on relying too heavily on people acting on information and making "rational" decisions. The choice given in the Swedish system to retire early on a lower pension, for example, could be "pushing rationality a step too far".[520]

424. The White Paper's approach to state pension reform was described by a number of witnesses as relatively complex. In addition, it was argued that high expectations are placed on the success of the new system of personal accounts, with people needing to participate in order to achieve adequate retirement incomes in the future. While auto-enrolment would 'nudge' people towards participation, it would still leave them with "complex and important decisions" to take[521] (see para 60).

425. The package of proposals as a whole, therefore, will create new challenges in equipping individuals to make appropriate decisions. They will need:

  • accurate information about what they can expect from the state in the future (see para 236);
  • to be able to make confident and informed decisions with respect to the new system of personal accounts - whether to opt in and how much to contribute (see paras 54 and 84).
  • to understand the level of investment risk involved in Defined Contribution schemes (including the new personal accounts). (see para 128).

426. Teresa Perchard of Citizens Advice argued that:[522]

    "By moving to perhaps a simpler system but taking 20 or 20-plus years over it actually generates a greater need for consumer information and advice throughout that process, and would need to be targeted to people in different circumstances, age, income and other things they might want to spend their money on. That is a really complex area of this which is probably understated in the White Paper and certainly will not be resolved through leaflets and whether they are in orange envelopes or not, and will require really a quite sophisticated strategy to ensure everybody gets the information they need to make the choices that would affect them, depending on their age and their income".

427. The package of reforms proposed by the White Paper will create various substantial new information, education and advice needs, which we deal with in turn below.

Information: forecasts and DWP publications

428. The first building block of information people need when planning for retirement is what they will get when they retire if they carry on as they are doing. Giving people clear, simple pensions forecasts is therefore crucial.

429. When the Committee visited Sweden we were shown the annual statement for public and premium pensions that is sent out there.[523] The statement is known by the striking orange envelope in which it is sent out. As well as giving the current monetary values of the funded and non-funded elements of the Swedish state pension, there is a forecast of pension entitlement at the ages of 61, 65 and 70. No information is included about occupational or private provision, although there is a website[524] which enables combined forecasts to be requested.

430. The Department for Work and Pensions has a PSA target, by 2007-08, to issue 15.4 million individuals with a pension forecast "regularly".[525] There are currently four types of targets: Combined Pensions Forecasts (CPFs), Automatic Pension Forecasts (APFs), Individual Pension Forecasts (IPFs) and Real Time Pension Forecasts (RTPFs).

431. Combined Pension Forecasting is a service provided by DWP which means that pension scheme members or employees can see forecasts of both their State Pension and private pension together. It was launched in October 2001 following successful exercises working with private- and public-sector employers and pension providers. These showed that 98% of scheme members and employees who gave feedback about the combined pension forecast exercise said they found the forecast useful.[526]

432. Under the scheme the Pension Service provides the pension provider with details of the current State Pension that the scheme member or employee has built up at the time of the forecast; and a projected State Pension that has been worked out up to State Pension Age. The provider then includes this information in the stakeholder, occupational or personal statements sent out to scheme members or employees.

433. In a written answer in February 2003 the then Minister noted that "State Pension forecasts have been issued to individuals by DWP on request for a number of years. The Department expects to issue around 0.75 million such forecasts in this financial year. The Green Paper also announced that from May 2003, the Department will commence the automatic issue of State Pension forecasts and supporting information to the self-employed with a view to extending this service across the rest of the working-age population over the next five years. We will evaluate the self-employed exercise and alongside other research this will inform the sequencing and volumes of other automatic forecasts."[527] The then Secretary of State reported in June 2004 that "Next year we will send automatic State Pension forecasts to 8 million people, with the aim of reaching out to all parts of society, especially those who do not have a workplace pension."[528] The Real-Time Pensions forecast service is available on the Internet and was introduced in autumn 2004.

434. The Department has stated that it is on course to meet its target, as between April 2005 and the end of March 2006, a total of 12,279,266 individuals were issued with "at least one" of the four forecast types.[529]

435. Teresa Perchard, from Citizens Advice, described the introduction of Combined Pensions Forecasts by DWP as "an amazing initiative" but stressed that the provision of information needed to be more consistent:[530]

    "Obviously, some people are not getting combined pension forecasts yet. I have had only my state one; perhaps I am not yet in the danger zone for anything else, or cannot be found anywhere else. That is important, to stabilise it, so that people who are advising individuals know what to expect as well, that there is not a wide variety of different presentations being distributed to individuals. That will be important for the front line in the Pension Service, DWP, too, because its staff need to know, the fewer variants on their communications the better for quality of information and advice, usually."

436. DWP officials have recently visited Sweden and the Secretary of State assured us that the Government was seeking to raise its game and implement what it had learned there:[531]

    "We have looked at that and there is a lot of attraction to that. There is more work that we need to do, and the pensions service themselves are gearing up to do that, to be pro-active in terms of pension forecasting, to make them more regular. The system has got better in recent years but this is an area where we will be looking to improve the service we provide to the public."

437. As noted in our predecessor Committee's report on Pension Credit, the Pension Service currently faces a significant challenge in making substantial reductions in staffing levels as part of the 'efficiency' agenda.[532] In evidence to the current inquiry, the Public and Commercial Services Union pointed to problems of staff morale and rising caseloads.[533] The Pension Service's capacity to meet the new challenges posed by the White Paper reforms is an issue to which the Committee may wish to return.

438. We think that there is scope to improve the format and the regularity with which the Pensions Service provides pensions forecasts and strongly believe that accurate Combined Pension Forecasting will be a key motivator for increasing retirement saving. While the Swedish orange envelope is not the complete solution to the problem, as it does not include information about private or occupational provision, it has two key advantages of being distinctive and simple and should be the starting point for reform.

Availability of DWP leaflets

439. The DWP produces leaflets and publications, as well as its website, to assist people with making pensions decisions. The National Audit Office recently produced a report that was critical of the number and readability of DWP leaflets. One of its conclusions was that leaflets aimed at pensioners and disabled people were the most difficult to obtain. Availability was tested at 100 Departmental outlets, as well as 100 other sites where customers might seek information, such as libraries.[534] The Report concluded that: "the need to convey often complex information in accessible formats is a constant challenge for the Department, on the one hand ensuring that information is complete and accurate, but on the other, that often complex information is concise and accessible."[535]

440. Giving evidence to the Public Accounts Committee in June, Leigh Lewis, the Permanent Secretary of the Department, said that "every single one of our leaflets should have [Plain English Campaign] crystal mark accreditation"[536] While not disagreeing with the NAO's comments about the difficulties of getting hold of leaflets aimed at pensioners and disabled people,[537] he said that he was "hugely proud" of the pensions guide, which includes details of all government services relevant to pensioners.[538] He added that the DWP:[539]

    "had now taken a very clear decision that every single one of our Jobcentre Plus offices - that is some 800 nation wide - will now stock a basic leaflet on pension credit."

441. Matthew Nicholas, Acting Director for External Relations and Communications, Jobcentre Plus, explained later during the same session that more was being done to ensure that Jobcentre Plus was stocking leaflets on pensions:[540]

    "When the National Audit Office did the work we were at an early stage of having clear standards for displaying leaflets. Since then, we have gone back to check every one of our offices, not just the ones that the NAO visited, to make sure that a full set of leaflets is there and on display. We have extended that list to some of the key leaflets for people interested in pensions, for example, and we are going to review that at least every six months to make sure that clarity is there."

442. We were concerned to learn from a recent NAO study that some leaflets relating to pensions were not available at DWP sites and were difficult to obtain elsewhere. We welcome the assurance given to the Public Accounts Committee that from now on "key leaflets" relating to pensions will be displayed in every Jobcentre Plus outlet.

Building financial capability - access to advice

443. The Resolution Foundation argued that:[541]

    "Pensions decisions are among the most complex and vital of those choices and reform, although much needed, has the potential to add a further layer of complexity. The evidence from the Financial Service Authority's 'baseline' survey into financial capability suggests that the vast majority of people in the UK are capable of exercising the basic financial skills needed to make ends meet and keep track of their money. However, the survey also shows that significant numbers of people are unable to plan their finances effectively or, critically, choose the right products."

444. Citizens Advice expressed disappointment that there was "not more emphasis on information, advice and financial capability in the Pension Commission's report."[542] Citizens Advice supported the Financial Services Authority's initiative to establish a Financial Capability Strategy for the UK and said that "so far it is not clear to us how much consumers who are financially excluded are properly encompassed in that strategy. Activities to address financial capability of adults are likely to involve significant resources."[543]

445. Financial education would form part of any financial capability strategy. The Secretary of State argued that this was important:[544]

    "On the day we published the White Paper, the Prime Minister and I went to the City to visit Merrill Lynch who, as part of their corporate responsibility agenda, which is very impressive, sent some of their people out into the local schools in the East End of the capital to talk to young children, 13 plus, about money and saving. It was very, very interesting to hear the messages that these young people had picked up. They wanted to save for Gucci handbags, which is fine and I have no particular problem with that, but they were beginning to understand the language of saving and putting money aside. That is so important because it underpins a lot of what we are trying to in the White Paper. "

446. The Pensions Policy Institute suggested there were useful lessons to be learned from the experience in New Zealand, where the Retirement Commission and 'Sorted' website - "well-established sources of information and guidance on making financial decisions" - were to be enhanced with:[545]

    "financial education 'champions' in the workplace widening the reach of such guidance where it is needed because of the workplace-based context of KiwiSaver. The UK has no such unique source of unbiased help. Introducing a similar body offering information, education and tools to help make decisions on financial matters - not just connected with the NPSS, but also covering issues such as debt management and all forms of saving - seems not only essential if an NPSS-style product is introduced, but if done well is also likely to be popular."

447. Both Citizens Advice and the Resolution Foundation, however, agued that financial education and information would not be enough on their own. "People also need advice, accompanied by appropriate external prompts to help them make decisions."[546]

448. The Resolution Foundation argued that the lack of financial advice for some 12 million people on medium to low incomes results in "poor financial decision-making, often at a significant cost to the individual and the State."[547] It argued that it was essential that "generic, non-regulated advice is made available to assist" the target group for the new system of personal accounts to make decisions "at key points during their pensions lifecycle":[548]

  • When they first come into contact with the pensions system, need to understand it and are first required to make decisions about their options.
  • At key points during their pensions lifecycle, for example if their personal circumstances change, they reconsider their retirement aspirations or the system itself changes.
  • When they reach retirement age and need to make decisions about realising their pension assets, alongside other issues such as considering their long term care

449. Teresa Perchard, from Citizens Advice, referred to work done by the Resolution Foundation to establish whether there was a business case for this.[549]

    "we are talking about quite substantial funds, over £100 million, to set up a service which involves any degree of face-to-face advice. It is very important that this is a comprehensive information advice service which can look at debt commitments as well as savings, so borrowing and saving, short and long term."

450. Doug Taylor of Which? said:[550]

    "I think it is important that, if such a system were to be set up, it was provided by trusted intermediaries clearly. Citizens Advice Bureau is one such set of trusted intermediaries within the UK."

451. The details of how such advice should be delivered, and by whom, along with issues such as the balance in any strategy between web-based information, generic advice and specialist advice, and the inter-relationship with long term care, are not matters that the Committee has had time to address in the course of this inquiry. We note that the Treasury Committee is currently undertaking an inquiry on financial inclusion[551] and will note the findings with interest.

452. Asked about how generic advice on the personal accounts scheme might be provided, the Minister for Pensions Reform, James Purnell MP, told us that the Government was open-minded. "There are some big decisions that we need to take as a first step before we can decide the type of advice."[552]

453. We conclude that a strong case has been made for the provision of free generic financial advice to those on below median incomes and recommend that DWP, DTI and the Treasury continue to work with organisations such as Citizens Advice and the Resolution Foundation to develop a model to meet the needs of this group and make the necessary resources available.

454. Identifying information and advice needs and developing an appropriate strategy for meeting them will be essential to ensuring the reforms are a success. This strategy must encompass a number of different elements, including pensions forecasts, DWP leaflets on the pensions system, the marketing of the new personal accounts scheme, building financial capability and giving people access to face-to-face generic advice. The crucial point is to ensure that the key messages in all these media are consistent and targeted towards key groups of undersavers.

514   Q 59 Back

515   Pensions Commission, Second Report, November 2005, Appendix D, p 115 Back

516   Q 3 Back

517   Q 3 Back

518   Q 87 Back

519   Q 74 Back

520   Q 68 Back

521   Ev 273, para 15 Back

522   Q 505 Back

523   Ev 432 Back

524 Back

525   Department for Work and Pensions, Departmental Report 2006, May 2006, Cm 6829, p 63 Back

526 (Pensions Service guide to Combined Pensions Forecasts) Back

527   HC Deb 26 February 2003, col 605W Back

528   Speech by the then Secretary of State for Work and Pensions, the Rt Hon Andrew Smith MP, 29 June 2004, at the Pension Information Pack launch, available at Back

529   Department for Work and Pensions, Departmental Report 2006, May 2006, Cm 6829, p 63 Back

530   Q 512 Back

531   Q252 Back

532   Work and Pensions Committee, Third Report of Session 2004-05, Pension Credit, HC 43-I Back

533   Ev 336, para 79 Back

534   National Audit Office, Department for Work and Pensions: Using leaflets to communicate with the public about services and entitlements, HC (2005-06) 797, para 18 Back

535   National Audit Office, Department for Work and Pensions: Using leaflets to communicate with the public about services and entitlements, HC (2005-06) 797, para 5 Back

536   Uncorrected transcript of oral evidence taken before the Public Accounts Committee on 7 June 2006, HC (2005-06) 1202-I, Q6 Back

537   As above, Q36 Back

538   As above, Q32 Back

539   As above, Q36 Back

540   As above, Q41 Back

541   Ev 272, para 6-7 Back

542   Ev 263, para 8.1 Back

543   Ev 264, para 8.16 Back

544   Q 253 Back

545   Ev 401, para 76 Back

546   Ev 272 para 10; Ev 253, para 8.15 Back

547   Ev 273, para 13. See also Resolution Foundation, 2006, Closing the Advice Gap: providing financial advice to people on low incomes, For a definition of generic financial advice see para 62.  Back

548   Ev 272, para 15 Back

549   Q 509 Back

550   Q 509 Back

551   Treasury Committee, Fifth Report of Session 2005-06, The Design of the National Pension Savings Scheme and the Role of Financial Services Regulation, HC 1074-I, para 51 Back

552   Oral evidence taken before the Work and Pensions Committee on 28 June 2006, HC (2005-06)1362-I, Q 118 Back

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