Transparency has long been a cause of concern for the pensions industry, both for individual savers and for those managing pension schemes. The Government and regulators show welcome signs of being alert to these concerns and are making positive steps towards remedies. There should, however, be no cause for complacency.
The charge cap on default defined contribution pension schemes, introduced in 2015, does not appear to have had the negative impacts some had predicted. But not all charges are covered by the cap and the full extent of charges outside the cap is not known. This makes it impossible to know how well the cap is working in practice. Within the charge cap, pension savers can face wildly different outcomes—some with small dormant pension pots could see their savings completely wiped out through Government-permitted flat fee charging structures.
In most cases, members of defined benefit pension schemes should not be directly impacted by the costs or investment decisions of their scheme. But poor decisions on costs or investments may in some cases lead to an underfunded scheme, which can have negative consequences for scheme members. There is no reason for there to be a lower level of scrutiny by trustees of defined benefit schemes than there is for defined contribution schemes.
We have received worrying evidence that some trustees are making investment decisions without a clear understanding of how much those decisions cost. Proposals to address this through disclosure templates developed by the industry are welcome. However, we are not convinced that there are sufficient incentives to achieve a high take up through voluntary disclosure alone. Industry involvement is important to ensure that policies work in practice—but the overall drive and direction must come from the Government and regulators. The Government and regulators should not wait for the industry to fail to act voluntarily as they have so many times in the past.
We fully recognise that value for money is not solely about costs, but costs inevitably form an important part of the equation. Complexity and layers of intermediaries mean that many trustees do not have access to suitable information to make judgements about the costs of managing their schemes. Without an agreed definition of value for money it is not possible to make effective comparisons. Schemes should clearly communicate their interpretation of value for money, and how it will be achieved, to their members.
The Competition and Markets Authority’s Investment Consultants Market Investigation final report, published during the course of this inquiry, has welcome proposals to address conflicts of interest and cosy relationships between schemes and asset managers and to ensure that trustees are actively seeking value for money.
While we have not received compelling evidence that higher-cost providers provide better performance, there are justifiable reasons for some schemes using them. We are encouraged that the Minister for Pensions and Financial Inclusion is seeking solutions to better enable pension schemes to invest in infrastructure and other illiquid assets whilst not fundamentally undermining the charge cap.
A government-backed pensions dashboard will be a welcome, if overdue, additional tool to provide transparency to individuals and help them plan how they use their pension funds. The Government must now take a leading role in the delivery of the project to ensure consumers get the full benefits. We accept that for a pensions dashboard to be launched in a timely manner, it will necessarily be limited at the outset. This should not be at the expense of the launch excluding any key data on an individual’s pension savings, including personal State Pension projections.
The pension freedoms had two important components: the right to choose and the guarantee of guidance to ensure that the choice is an informed one. Pension Wise has been successful in delivering guidance to its customers, but too few people are using the service. The new Money and Pensions Service will need to outline how it will increase the number of people using Pension Wise.
We welcome the FCA’s proposals to introduce a set of investment pathways for decumulation products, in line with the recommendation we made in our 2018 report on pension freedoms. These investment pathways must not become a substitute for guidance, which is still required to help individuals determine which product is right for them.
In our Pensions Freedoms report we also recommended a 0.75% charge cap on these pathways. The FCA told us that it would prefer first to see if market-consistent tools work and then, only if those fail, to introduce a charge cap. This conversation is a near repeat of those our predecessor Committees had with the FCA about schemes used for automatic enrolment savings, which are now the subject of a charge cap. The FCA would send a simpler message to the industry if it just set a charge cap now for investment pathways, rather than issuing vague threats to the industry.
Many Independent Financial Advisers provide good value for money to their pension customers. However, the number of people paying for good value advice is low. People who are not able to access good advice need guidance and effective protection from pension scams, which can have life changing impacts. Scams not only harm individuals but also cause wider damage to the industry by discouraging potential savers. Scams are not a necessary consequence of the pension freedoms.
We and our predecessor have twice asked the Government to improve its monitoring and reporting on progress of the pension freedoms and default guidance, yet there remains an absence of a regular authoritative assessment of the policy. We hope for success at the third time of asking.
In 2019/20, those with earnings below the personal allowance and contributing at statutory automatic enrolment rates will see a difference of around £65 per year between net pay and relief at source tax relief arrangements. Over a lifetime of pension saving this will be a significant amount to many people and a significant proportion of their pension savings built up through automatic enrolment. The Government says that it would cost too much to put this right. In doing so, it risks damaging faith in the system, by perpetuating arrangements which cause individuals to lose noticeable sums through decisions they did not make.
Published: 5 August 2019