Pension freedom guidance and advice Contents

6 Long-term concerns

68.The pension freedom reforms are just six months old. Like our predecessor Committee, we strongly support these important changes but have concerns about the dangers to retirement savers they bring in their wake. A radically altered environment has yet to settle down and there is less information about its state than there ought to be. Earlier in this Report we identified concerns that need to be addressed with urgency. It is inevitable that other potential problems that are not yet apparent will emerge. The success of the policy can only be measured against consumer outcomes over many years. Over the course of our inquiry we heard examples of international experience that offer warning signs and lessons for how pension freedom should develop. We also took evidence in favour of more radical policy measures than the adjustments we have recommended.

Lessons from overseas

69.The United States and Australia were two examples of countries with liberalised pension decumulation markets that were often referred to in our evidence. The Personal Finance Society told us that more needed to be done to support people in the UK to avoid the undesirable outcomes seen in these countries.183 David C. John, an American pensions expert, said that financial advice in the United States was largely the preserve of the well-off while general guidance tended to befuddle consumers with unfamiliar jargon. Rates of annuity purchases were very low and survey data showed that a large proportion of American pensioners would run short of money.184 Just Retirement referred to analysis showing 25% of Australians who accessed their pension savings at age 55 had exhausted the full amount by age 70.185 Other, more risk-averse, consumers had removed very little money from their pots, leaving much of it unused when they died.186 In Australia, a recent Financial System Inquiry, also known as the “Murray Review”, recommended that pension funds be required to offer members a “pre-selected” retirement income product, which would provide a regular, stable income stream and longevity risk management while retaining some flexibility.187

70.Other witnesses warned that direct comparisons could not be drawn between Australia and the UK. Chris Curry pointed to different regulatory and tax systems and the absence of a history of annuity purchases or longevity insurance in Australia.188 The Minister noted that Australia still had a means-tested state pension, while in the UK the new fixed-rate State Pension would not generate the same incentives to run down private funds.189

Default options

71.Some witnesses drew on the experience in Australia in suggesting that a form of pre-selected or default decumulation option should be considered in the UK.190 On seeking to access their money a saver might be informed by their provider of their default option, which they would be entitled to opt-out of if they chose to. Impartial Pension Wise guidance would give them the opportunity to assess the default.191 Huw Evans said that, however good regulation and advice were, some people would find the decision of what to do with their pension pot too daunting and would continue to defer it.192 The NAPF told us that there was a “clear role” for defaults, arguing that they would particularly help “savers who are unengaged, who cannot choose a solution for themselves and who are therefore at risk of poor retirement outcomes”.193 The Investment Association said that a default retirement income strategy based on a combination of investment and insurance approaches would “circumvent” advice gaps.194

72.Default decumulation options are in many ways consistent with the new system of auto-enrolment for accumulation, whereby employers must put employees, unless they choose to opt-out, into a workplace pension scheme.195 The FCA noted that “when auto-enrolled, most people will join the default fund at the default contribution level”.196 We also heard the case that default options were consistent with freedom and choice. Consumers would still need to make a decision at some stage and would retain the flexibility to opt-out of any default.197 The Murray Review in Australia concluded that “pre-selected options have been demonstrated to influence behaviour but do not limit personal choice and freedom”.198

73.Others argued that default options were against the spirit of freedom and choice. Chris Hannant said “we had a default. It was annuitisation. We have moved away from that”.199 Tom McPhail said that default products would not, in general, account for the particular retirement needs of individuals. Meeting those needs would require customer engagement at some point.200 Default options would also tend to discourage “shopping around” for good value products from different providers, the lack of which was highlighted by some as already a major problem with the pension freedom reforms.201 Consumers would tend to default to their existing provider’s suggested product. This inertia was unlikely to work in favour of the customer, as had been demonstrated by the poor value annuity market that pension freedom supplanted.202

74.The Minister told us that, while she expected pension providers to seek to develop products with default pathways and employers with auto-enrolment schemes to take a more active role at the point of retirement, she did not expect the Government to be “legislating a default option any time soon”.203 The Financial Inclusion Centre said that, while they thought default options would eventually be required, consideration of that was for the longer term, once short-term interventions to protect consumers had been tested.204

75.Default decumulation options would offer protection to those unable or unwilling to engage with their pension choices while retaining for others the opportunity to exercise more active choice. However, their introduction would amount to a philosophical departure from the pension freedom policy. It would risk greater disengagement with saving and enable firms to exploit incumbency further to the potential detriment of consumers. Legislation for default options should only be introduced if long-term monitoring of the consumer outcomes from pension freedom indicates that it is necessary.

A watching brief

76.This inquiry focused on ensuring the provision of high-quality guidance and advice, a necessary precursor to the success of pension freedom. In doing so we did not cover other important concerns about the reforms such as the rate at which consumers are being afforded access to a range of decumulation products, transfer times, levels of exit fees and other charges, and the interaction between drawdown and the new State Pension. A fuller picture of the effects of the reforms will begin to emerge when more data are published. We will monitor these developments carefully.

77.A watching brief on pension freedom is imperative and we intend to return to this issue over the course of the Parliament. Whether improvements in the quality and take-up of guidance and advice can be achieved will be central to the success of the policy. It is right that people should be able to choose what to do with their retirement savings. However, freedom to choose is not enough; people must have freedom to make informed choices.

183 Personal Finance Society (PFA0017)

184 David C. John (PFA0046)

185 Just Retirement (PFA0033)

186 Q31 (Chris Curry)

187 Partnership Assurance Group (PFA0037)

188 Q31 (Chris Curry)

189 Q127 (Harriett Baldwin MP)

190 Partnership Assurance Group (PFA0037), Q52 (Huw Evans)

191 National Association of Pension Funds (PFA0042)

192 Q52 (Huw Evans)

193 National Association of Pension Funds (PFA0042)

194 The Investment Association (PFA0015)

195 E.g. Age UK (PFA0023)

196 Financial Conduct Authority (PFA0044)

197 Q31 (Chris Curry), Q52 (Huw Evans)

198 Financial System Inquiry, Final Report, November 2014, p91

199 Q52 (Chris Hannant)

200 Q52 (Tom McPhail)

201 LV= (PFA0038), Just Retirement (PFA0033)

202 Q38 (Tom McPhail), Q124 (Harriett Baldwin MP)

203 Q124 (Harriett Baldwin MP)

204 Financial Inclusion Centre (PFA0039)