Pension freedom guidance and advice Contents

Conclusions and recommendations

Assessing pension freedom

1.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. Regular collection and reporting of the takeup of guidance and advice options on offer, and the decisions taken, is imperative. This should also provide some assurance that another mis-selling scandal is not on the horizon. (Paragraph 16)

2.We recommend the Government publish, or require its regulators to publish, statistics on Pension Wise and the advice and pensions markets on a quarterly basis, encompassing:

a) customer characteristics including pension pot size and other sources of retirement income;

b) take-up of each channel of guidance and advice;

c) reasons given for not taking up guidance and advice;

d) subsequent decisions taken; and

e) reasons given for those decisions. (Paragraph 17)

3.While we support pension freedom, its long-term effects remain highly uncertain. The full picture of eventual consumer outcomes will emerge over many years. These outcomes must be monitored closely. We recommend that the Government initiate a rolling research programme to track the longer-term consequences of pension freedom decisions. We expect the Government to detail its approach to assessing the long-term effects of the reforms in its response to this Report. (Paragraph 18)

Scams

4.The pension freedom reforms have increased the prospects of people being conned out of their life savings. Financial scammers are notoriously adept at reinventing themselves to take advantage of such opportunities. But this does not mean scams should be accepted as a fact of life. The Government and the FCA are taking the right approach in promoting awareness as the best weapon against scamming. But they could do more. In particular, pension providers are an underused point of contact, for example when a customer wishes to withdraw funds to invest in a suspicious scheme. (Paragraph 24)

5.We recommend the Government urgently redouble its publicity efforts around pension scams. We further recommend the FCA tighten its scam awareness and reporting requirements for regulated firms. Scams are a tragedy for individual households and undermine trust in the law-abiding and responsible majority in the retirement finance sector. Scammers must be stopped. We will monitor action on pension scamming closely over the course of the Parliament. (Paragraph 25)

Pension Wise

6.Pension Wise was created to fill a potentially dangerous anticipated gap in support for consumers, including for many people who are unable or unwilling to pay for independent advice. Low take-up of its service is therefore a concern. The Government’s renewed marketing campaign is welcome and the publication of regular take-up statistics will allow the situation to be monitored. (Paragraph 31)

7.Pension providers are a key point of contact with their customers. We recommend the FCA strengthen its rules and guidance for pension providers regarding Pension Wise signposting and risk warnings; and assure compliance through mystery shopping exercises. We further recommend that the number and proportion of customers that contact Pension Wise having been signposted there by each provider should be tracked and published in regular statistics. (Paragraph 32)

8.Pension Wise guidance is currently too narrow for too many consumers. Decisions about retirement income products are not best made in isolation from information on property wealth, benefit entitlements, tax implications, care costs or debts. We recommend the Government work with the FCA and guidance providers to develop a more holistic Pension Wise service that offers more personalised support. (Paragraph 37)

9.The Pension Wise website is not fit for purpose. It is static, offering no opportunities for personalisation, and lags well behind many private services. This is a particular concern given it is the primary independent guidance channel for a large proportion of consumers. We recommend the Government ensure the Pension Wise website provides an indicative income calculator, illustrative examples tailored to individual circumstances and a printable summary function as a matter of urgency. Over time we would expect this service to enable customers to include other potential income and expenses in their calculations. (Paragraph 38)

10.A pensions dashboard is long overdue. Pension freedom merely makes it more urgent. Enabling people to view all of their pensions in one place will leave customers better-placed to make good decisions about their retirement savings. It will also encourage people to engage with their finances while accumulating a pension. There is clearly broad appetite for this reform. Provided data security can be assured, we would welcome its development in the private sector. However, Government has an important role in ensuring that progress is maintained. We recommend the Government announce a clear timetable for the introduction of a pensions dashboard in its response to this Report. (Paragraph 39)

11.Pension decision-making is increasingly complex. Where a large proportion of people once enjoyed defined benefit pensions or defaulted into an annuity, people are now increasingly required to take difficult decisions about their retirement savings at various stages of accumulation and decumulation. The one-off nature of Pension Wise guidance sits oddly with this reality. However, free guidance sessions can be expensive to provide and a wide range of alternative free and paid-for guidance and advice services are available or in development. In the absence of better data about Pension Wise and the pension freedom market, it is not yet clear that offering multiple sessions would be value for money. We recommend that the Financial Advice Market Review consider the case for offering two or more Pension Wise guidance sessions per customer. (Paragraph 42)

The advice market and regulatory clarity

12.Despite promising signs, the pension freedom market is clearly not yet operating entirely as it should. For consumers, already daunting terrain is more difficult to navigate than it should be as there are gaps in the availability of support. In particular, provision in the middle ground between free guidance and traditional but expensive face-to-face independent financial advice is woefully inadequate. As long as this gap persists, consumers are at risk of making poor decisions with their life savings. (Paragraph 59)

13.To their credit, industry and regulators alike have identified the affordable advice gap as a problem. We heard impressive examples of innovative products and over time we expect the market to adapt to largely close the gap. The future of financial advice and guidance is clearly predominantly online and interactions will be increasingly focused on single transactions. The role for regulators is to enable innovation and market entry by adapting to these changed circumstances. (Paragraph 60)

14.Complexity is a major obstacle to the smooth operation of the market. It restricts both demand and supply. Too many consumers do not understand what they are buying, either in advice or in financial products with jargon-laden descriptions and pricing structures that if conceived to confound could hardly be more convoluted. Understandably risk-averse providers are hesitant to bring new advice or pension products to market because of insufficient clarity surrounding the regulations that govern their operation. (Paragraph 61)

15.We encountered several examples of regulatory opacity. The boundary between guidance and advice is a mystery to consumers and providers alike. While we welcome the concept of safeguarded benefits, it is imperative that these protections are proportional and clearly bounded. Managing the “insistent client” problem is a delicate balance: consumers must be protected and memories of mis-selling scandals are still fresh. We have yet to be persuaded by the case for relaxing regulation to provide providers and advisers with “safe harbours” from liability. However, for pension freedom to operate effectively, it is necessary to ensure that people can get advice and, once informed, can take decisions contrary to that advice. Greater clarity would be an important first step. (Paragraph 62)

16.Examining the affordable advice gap rightly sits at the top of the priorities of the Financial Advice Market Review. In the pension freedom market, closing the gap should be the first policy objective of Government and regulators. The second, related, policy objective should be clarification and simplification (Paragraph 63)

17.We recommend that the Government and the FCA, as part of the Financial Advice Market Review, clarify:

a) the distinction between guidance and advice;

b) the definitions of safeguarded benefits; and

c) protections in providing advice to insistent clients. (Paragraph 64)

18.Accessible language and transparency about risks and charges should be central to the simplification process. We recommend the FCA bring forward new stronger rules and guidance for standardised language, and transparency in pricing, for pensions and associated advice. Once in place, it is important that these rules are strictly enforced: unnecessary complexity is as much an enemy of a smoothly-functioning market as more obvious regulatory transgression. (Paragraph 65)

19.The Government and FCA have ready access to a wealth of data. Where these data point to clear problems and potential remedies, they should act more quickly than their review timetables imply. Ongoing monitoring will enable such measures to be adjusted over time. (Paragraph 67)

Long-term concerns

20.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. (Paragraph 75)

21.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. (Paragraph 77)