Pension costs and transparency Contents

Chapter 3: Transparency for individuals

Pensions dashboards

79.A pensions dashboard is a digital tool which allows an individual to see all their pension savings in one place. Pensions dashboards are already active in several countries, including Australia, Belgium, Denmark, Israel, the Netherlands and Sweden.73

80.The development of an industry designed and funded dashboard was announced in the 2016 Budget, with a 2019 launch date.74 The DWP took over responsibility for the dashboard project from the Treasury in October 2017, with Guy Opperman, Minister for Pensions and Financial Inclusion, reaffirming the Government’s commitment at the Pension and Lifetime Savings Association annual conference. The Minister has described the dashboard as “a fantastic way of giving people access to pension information in a clear and simple form” and an element in the Government’s commitment to promote financial inclusion.75 The 2017 DWP review of automatic enrolment highlighted the dashboard as a tool for making pensions visible to savers and increasing engagement.76

81.The DWP originally announced that its feasibility study and announcement on the direction of the policy would be published in March 2018. This was subsequently changed to “in due course” in the Government’s response to our 2018 report on pension freedoms.77

82.In July 2018 reports began to circulate that the Government was considering withdrawing support for the dashboard.78 Giving evidence to us in July 2018, the Minister declined to give any further commitments.79 The Association of British Insurers, which has led industry efforts to develop and promote the dashboard, wrote to us in July 2018 expressing their concerns about any move to shelve the dashboard.80 In October 2018, the Minister called on pension schemes and providers to ensure their data was ready for the pensions dashboard launch and said that DWP was “utterly committed to making the dashboard a reality”.81

83.Witnesses from transparency organisations expressed their support for the dashboard. Dr Chris Sier, former Chair of the Institutional Disclosure Working Group, described it as an important first step in providing people with information about their savings.82 Andy Agathangelou, Founding Chair of the Transparency Task Force, said that the dashboard “was an absolute prerequisite if what we want is a fair, open, honest, competitive marketplace”, but that some “heavy lifting” from the pensions industry would be required to set up the portal because of “the lack of interoperability within the financial services sector”.83

84.There had been doubts about whether state pension forecasts would be included on the dashboard and reports that the Government had failed to budget for delivering state pension valuations on a pensions dashboard.84 In the 2018 Budget, however, the Treasury announced £5m additional funding for pensions dashboards and confirmed that these would enable individuals to see their State Pension and all other pension pots in one place.85

85.The Government ran a consultation on pensions dashboards from December 2018 to January 201986 and published its response in April 2019.87 The Government will legislate to compel pension schemes to participate in pensions dashboards and it is committed to “work towards including State Pension data in dashboards at the earliest possible opportunity.”88 The Government also asked the Money and Pensions Service to begin work on its own non-commercial pensions dashboard.89

86.A non-commercial 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. We welcome the Government’s ongoing commitment to the project. The Government should now take a leading role in ensuring that schemes adequately prepare their data ahead of launch and that the project delivers the full benefits to consumers.

87.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 any of the key data on an individual’s pension savings.

88.We welcome that the Government has committed to including State Pension data in pension dashboards. We recommend that personal State Pension projections be included in the Pensions Dashboard at launch, as they form a key component of many individuals’ pension incomes.

89.We recommend that by the end of 2019 the Government publish a timetable for the rollout of a non-commercial pensions dashboard. This should include key milestones, such as the date for pension providers to include their data on the pensions dashboard, as well as target timescales for phases beyond the initial launch—for example, longer term plans to enable consumers to make value for money comparisons through the pensions dashboard. With consent, authorised providers of financial services should be able to include an individual’s pensions dashboard data within their own applications.

90.We recommend that the pensions dashboard should feature retirement income targets to ensure the information is meaningful to its users.

Advice and guidance

The guidance guarantee

91.Individuals looking to make decisions about their pensions can seek both advice and guidance. Advice is a personalised recommendation and can only be provided by FCA regulated firms on the Financial Services Register. Guidance is a broader term including general information and signposting about pensions. Guidance does not include a recommendation but can be offered by any organisation. Guidance is available from public bodies to individuals through the Pensions Advisory Service, Pension Wise and Money Advice Service. All are to be part of the new Money and Pensions Service, which was temporarily called the Single Financial Guidance Body when it was set up in January 2019.

92.The ‘pension freedoms’, introduced in April 2015, gave people aged 55 or over far greater freedom over how they access their defined contribution pension pots. Previously the majority of people were required to purchase an annuity—most did so with their existing provider.90 As well as purchasing annuities, individuals can now take their whole pot in cash, leave funds invested or withdraw a proportion of the funds as an income through drawdown.

93.The “guidance guarantee” was presented as a key pillar of the introduction of the pension freedoms to support the increased flexibility given to consumers accessing their DC pension savings. The guarantee entitled everyone with a DC pension fund to free, impartial guidance. The 2014 Budget stated that “The government recognises that under the new system it will be important that people are equipped to make decisions that best suit their personal circumstances.”91 The FCA’s consultation on the guidance guarantee explained that the objective was to “empower consumers to make informed and confident decisions on how they use their pension savings in retirement”.92

94.The Financial Guidance and Claims Act 2018 requires the FCA to ensure consumers have received appropriate pensions guidance or have opted out of guidance before accessing or transferring their pension savings.93 Charlotte Clark, Strategy Director for Private Pensions, Department for Work and Pensions, told us that the Money and Pensions Service will be piloting ways of implementing the Financial Guidance and Claims Act’s default guidance provision.94

95.The Act also contains provision for consumers to “opt out” of the guidance to which they are entitled. Just Group, a specialist financial service group focusing on the retirement income market, emphasised the importance of getting the process of opting out right. It provided us with the hypothetical example below of how incumbent providers might try to discourage individuals from accessing guidance:

Mrs Jones calls her provider: “Hello. I’d like to take some cash from my pension please.”

Provider: “Certainly Mrs Jones. Though we have to recommend that you should consider taking guidance from Pension Wise before you take cash from your pension.

“The current waiting time to get an appointment is around five weeks. You could take your guidance then come back to us. So, in around six weeks we could get you some cash. Alternatively you can opt-out of taking guidance. I can arrange that for you today and I can have your cash available before the end of the week.”

“How would you like to proceed?”95

This demonstrates that, even with the opt-out in place, workarounds may be easily found. Just Group suggested:

The remaining policy that needs to be developed is the opt-out process and how this is set in regulation. We would urge the Committee to encourage the FCA to make this explicitly an active opt-out process that is administered by an impartial, independent entity such as the Single Finance Guidance Body and not an existing commercial organisation that cannot be independent nor impartial.96

96.Behaviour of this sort is evident even in reputable firms. In July 2019, the FCA fined Standard Life Assurance Limited (SLAL) £30.7m for failures in selling non-advised annuities. The FCA found that:

SLAL failed to put in place adequate controls to monitor the quality of the calls between its call handlers and non-advised customers. At the same time, SLAL offered its front-line staff large financial incentives to sell annuities, which encouraged them to place their own financial interests ahead of their customers. This gave rise to a significant risk that SLAL’s call handlers would fail to provide customers with the information they needed to choose an annuity appropriate to their circumstances.97

The FCA is proceeding to test potential approaches to ensure consumers have received appropriate guidance or opted-out of receiving guidance with the Government and the Money and Pensions Service.98

97.The pension freedoms had two important components: the right to choose and the guarantee of guidance to ensure that choice is an informed one. We are concerned that firms might be able to “game” guidance opt-out requirements and nudge individuals into not receiving guidance which they were promised.

98.We welcome progress by the Financial Conduct Authority and Money and Pensions Service in testing approaches to ensure that consumers have received appropriate guidance or opted-out of receiving guidance. We recommend that individuals should only be able to opt-out of guidance through an active decision communicated to an impartial body, such as the Money and Pensions Service. This should not be a process which needs to be repeated for every pension pot an individual has.

99.We recommend that for any transaction to be deemed valid, the relevant upfront costs and any further charges should be detailed on the front page of the product and the investor should be required to specifically sign that they are aware of those charges and have agreed to them. This should be the case for exiting a scheme as well as for investment into a new or additional scheme. Investors should also be given a 14-day cooling-off period where transactions can be reversed without detriment to the investor.

Pension Wise

100.In 2015 Pension Wise was unveiled as the new first port of call for people with a defined contribution pension approaching retirement.99 Pension Wise provides the guidance guarantee through a free and impartial service offering appointments in person and over the phone. For those using the service Pension Wise has been a demonstratable success. DWP user evaluation data shows that:

a)92% of appointment customers were satisfied with their overall experience.

b)Pension Wise users had a significantly better understanding of what they could do with their pension pots when compared to non-users.

c)Pension Wise users are more confident in their ability to avoid scams (92% vs 78% confident).100

101.However, concerns have been raised about how engaged users are with the guidance provided through by Pension Wise when they wish to access their pension pot. Charlotte Clark, Strategy Director for Private Pensions, Department for Work and Pensions, said:

Too often, if you listen to the phone calls, somebody has decided what they want to do, and this is almost a tick-in-the-box exercise for them. How do we engage with them early? There are a number of pilots going on with different providers to think about how can we get people to think about their pensions a little bit earlier before it is just a question of, “I have decided what I want to do, and I just need the money”.101

102.The number of people with defined contribution schemes using Pension Wise remains low compared to those accessing their pension pots, although there have been increases. The Minister for Pensions and Financial Inclusion and the Economic Secretary to the Treasury said that “In the first full year of the Pension Wise service (2015/16) there were 60,939 appointments. In 2018/19, there were 167,654 appointments; a 180% increase.” The FCA provided us with the data below102 showing the take up of advice and Pension Wise guidance by different decumulation products between October 2017 and March 2018:

Product	Annuity	Drawdown	UFPLS	Full withdrawal
Advised	28%	69%	30%	25%
Pension Wise	30%	11%	17%	15%

Source: Letter from the FCA to the Chair, 7 March 2019

103.Pension Wise has been successful in delivering guidance to those who use it and enabling these pension savers to make well informed choices. The high level of satisfaction with Pension Wise demonstrates the value of a service which is yet not achieving its potential reach.

104.We recommend that the new Money and Pensions Service should outline in its forthcoming strategy how it will increase usage of Pension Wise.

Investment Pathways

105.There is currently a difference in philosophy between the Government’s approach to pension accumulation (saving) and decumulation (withdrawing). Automatic enrolment requires that employers default their employees into pension savings. For most people, therefore, the accumulation phase of a private pension is passive—unless they choose otherwise. The opposite is true for decumulation: even when an individual with a DC pension receives advice or guidance, they are still required to make an active choice about what they do with their savings. This could be drawdown, purchasing an annuity or taking their whole pot as cash.

106.In our 2018 report on pension freedoms we called for a similar approach to automatic enrolment for drawdown products. In that report we recommended that:

… the Government takes forward FCA proposals to introduce default decumulation pathways. Any provider offering drawdown would be required by FCA rules to offer a default solution that is targeted at their core customer group. The same charge cap that applies to automatic enrolment schemes, 0.75%, should apply to default drawdown products. … These protections should be in place by April 2019.103

107.On 28 January 2019, a FCA consultation paper104 proposed a more passive default for decumulation. All providers of drawdown will have to offer non-advised consumers four investment pathways each with a different objectives:

Option 1: I have no plans to touch my money in the next 5 years
Option 2: I plan to use my money to set up a guaranteed income (annuity) within the next 5 years
Option 3: I plan to start taking my money as a long-term income within the next 5 years
Option 4: I plan to take out all my money within the next 5 years.105

108.The FCA also proposed that consumers’ pension investments should not be defaulted into cash savings unless they actively chose this option.106 Chris Woolard, the FCA’s Executive Director of Strategy and Competition said:

There is a group of people who are going into draw-down at this moment in time. We know from the work we have done on research that the big question for people is how they get their 25% tax-free cash now. People concentrate on the decision around the 25% tax-free cash, but not on the decision around the other 75%. As Andrew was saying, many end up defaulting into holding that money as cash. Clearly, if you intend that to be your vehicle, that gives you an investment income over the next 30 years, that is not a good option. You should be in something that is investing that money for you, and from which you are drawing down.107

Mr Woolard added that he was not happy that well over 60% of people default to decumulating with the same provider they used for accumulation.108

109.In its 2018 consultation, the FCA had said that it was “not minded” to impose a charge cap on these products, as the market was evolving.109 When asked about a charge cap being placed on default decumulation products, Andrew Bailey said that the FCA’s general approach towards capping “is that we regard it as a tool in the box to be used when what I would call more market-consistent tools are clearly not working and the market is failing.”110

110.We welcome the FCA’s proposals for the investment pathways. These are in line with the recommendation we made in our Pensions Freedoms report last year—namely, that any provider offering drawdown should be required by FCA rules to offer a default solution that is targeted at their core customer group.

111.The investment pathways must not be a substitute for guidance, which is still required to help individuals determine which product is right for them. For example, it is not clear to us how, under the proposed investment pathways, an individual who states that they plan to use their money to set up a guaranteed income is supported to do so. Many people who have passively built up retirement savings through automatic enrolment would likely need support through advice or guidance if they wanted to make an informed choice on purchasing a product which provides a guaranteed income.

112.We recommended in our Pensions Freedoms report a 0.75% charge cap on default decumulation pathways. The FCA told us that it would prefer to see if market-consistent tools work and, if those fail, introduce a charge cap. This conversation is a near repeat of those our predecessor Committee 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 by setting a charge cap now for investment pathways—rather than issuing vague threats to the industry.

113.We recommend that the FCA implement a robust monitoring programme for the effectiveness of the investment pathways, including value for money comparisons with other available products, in partnership with any other DWP monitoring work of the pension freedoms.

114.We recommend that the FCA clearly set out how people who have passively built up saving through automatic enrolment will be supported to make and carry out an informed choice from the available decumulation products and not solely directed to drawdown products.

115.We recommend that a 0.75% charge cap should be set on decumulation products available through FCA decumulation pathways from the outset.

Independent Financial Advisors, mis-selling and scams

116.The evidence we received gave a mixed picture as to whether pension customers get value for money from financial advisers. Several submissions pointed to returns associated with financial advice. Quilter’s, a wealth management business, said that their annual research of 50–75 year olds shows that those retirees who have seen an adviser even just once had, on average, £7,000 more per year in retirement.111 Royal London, a mutual life, pensions and investment company, stated that “The research demonstrates that those who receive financial advice are on average £40,000 better off than their peers.”112

117.Others, however, raised concerns about the availability and quality of advice. Unison said that “It is impossible for financial advisers to offer value for money because the whole pension and workplace saving system is riddled with conflicts of interest and opaque charging.”113 Low take up of advice remains a concern. The Association of British Insurers told us that “only 12% of consumers over the age of 40 use a Financial Adviser.”114 The Transparency Task Force said:

Unconflicted good quality advice on finance is a benefit for anyone considering how to plan for and fund their retirement. For those who can afford to access it, there is a good argument that this facilitates their ability to navigate the market.

However, good quality independent advice is unfortunately a scarce resource that often appears expensive and a mass pension system cannot be predicated on the basis that people will be able to access it. In addition, there are behavioural biases that mean many low and medium earners will not access either advice or guidance–even when it is made available at low cost or even free.115

118.Another evidence submission highlighted the British Steel Pension Scheme as evidence of the system not working.116 A large number of former members of the British Steel Pension Scheme were victims of mis-selling and traded their defined benefit pensions for a cash lump sum. Our 2018 report into the British Steel Pension Scheme concluded that “another major misselling scandal is already erupting and requires urgent action.”117

119.Self-invested personal pensions (SIPPs) are causing a similar level of concern. Several of our Members have seen cases in which ordinary investors have lost large amounts of money because FCA-regulated advisers have advised them to use SIPPs. Andrew Bailey, CEO of the FCA, wrote to SIPP operators in October 2018 about their ability to pay out for potential compensation schemes. He told us that “the message clearly got home, because we got some very clear responses, but the jury’s out in terms of the practice.”118

120.Initially the FCA told us that its pension scams team consisted of “approximately 10 people” out of about 3,700 FCA staff.119 The FCA clarified that this was the dedicated team which worked with other staff across the organisation, and provided us with further information on how it addresses pension scams:

A typical pension scam case may involve the pension scam supervisory team looking at the adviser firm advising consumers, a different supervisory team looking at SIPP Operators that are holding the investment that may be central to the scam, another different supervisory team looking at any Discretionary Fund Manager that is being used as a wrapper underlying the SIPP investment, another different supervisory team looking at the underlying funds, the Unauthorised Business Department (UBD) looking at the unregulated introducers sending the business to the adviser firm and an Enforcement team which will work with the supervisory teams on urgent interventions using Enforcement resource. Once the supervisory work is undertaken, the most serious cases are referred to Enforcement for formal investigation.120

The FCA publishes a list of unauthorised firms on its website, some of whom are knowingly running scams. Private lists are also held by HMRC and some pension providers.

121.Many Independent Financial Advisers provide good value for money for 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 the individual but cause wider damage to the industry by discouraging potential savers. Scams are not a necessary consequence of the pension freedoms.

122.We were concerned to learn that the FCA’s dedicated scams team only consisted of approximately 10 people out of 3,700 FCA staff. We recommend that the FCA review whether it dedicates sufficient resource to combat active pension scams, prevent new pension scams and protect individuals.

123.We recommend that the Financial Conduct Authority’s list of unauthorised firms be expanded into a widely publicised database. This database should be regularly updated by the range of governmental organisations involved in pension scams and act as a co-ordinated early warning system.

Monitoring the Pension Freedoms

124.Aside from the FCA’s retirement income market data and DWP Pension Wise user evaluations, there are no regular monitoring reports published to provide an aggregate analysis of the pension freedoms or guidance guarantee. The Committee has previously recommended that the Government publish regular monitoring reports on the pension freedoms. Our Pensions freedoms report concluded and recommended that:

The FCA has undertaken important work in monitoring decisions made by people exercising their pension freedoms. There is little evidence that people are being reckless with their savings; if anything they are being overly conservative. We assume that the Government wants consumers to make well-informed decisions in keeping with their financial interests. It is difficult to square that with, for example, people withdrawing pension pots to leave them resting in low interest cash bank accounts.

If the Government does not know the intended effects of its policy, it cannot make informed adjustments to improve its operation. We recommend that the Government sets out in response to this report (a) what the long-term objectives of pension freedoms are and (b) how it will monitor and report on performance outcomes against those objectives.121

125.Our predecessor Committee also said in its Pension freedom guidance and advice report that the lack of published statistics, six months after the pension freedom reforms, was unacceptable.122 Since then the Government has continued to build on the pension freedom reforms with new policies and developments such as the midlife MOT, still without a holistic monitoring programme of the overall impact.123

126.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.

127.We recommend that the Department for Work and Pensions publishes an annual report on pension freedoms and the guidance guarantee. It should make use of the existing annual release of Pension Wise user evaluations and existing data produced by the regulators, as well as data on competition in the industry’s markets and the effectiveness of newer policies such as the midlife MOT. The annual report should also give a regular aggregate assessment of the policy and industry.

Net pay versus relief at source

128.There are two ways pension schemes can collect tax relief for savers: net pay and relief at source. A net pay arrangement is where the pension contributions are collected before income tax. This gives taxpayers automatic full tax relief at the highest rate and no income tax is paid on contributions.

129.In relief at source schemes, employers take 80% of an individual’s pension contribution from take home pay, i.e. after income tax has been deducted. Tax relief is reclaimed from HMRC by the pension scheme who send back the basic rate of tax, 20%. This means that, in effect, employees who do not pay tax get a contribution from the Government to their pension scheme, equivalent to the contribution which would be made if they paid tax at 20%. Higher or additional rate taxpayers can claim back the rest of the tax relief from HMRC by either writing to them separately or through an annual self-assessment tax return.

130.In a net pay arrangement, employees who do not pay tax do not get tax relief, and therefore no Government contribution, on their pension contributions from the government. Andy Agathangelou, Founding Chair of the Transparency Task Force, said:

… the net pay versus relief at source scandal. It is a scandal. It is likely to end up in the court sooner or later if the regulators and Government do not fix this. Very simply, there are low-paid earners who are missing out on tax relief they are entitled to because the employer has selected a pension scheme that prevents them from having that benefit. That is a major problem and it undermines value for money.124

131.The same point was also raised by Adrian Boulding, then Director of Policy, NOW: Pensions in oral evidence on automatic enrolment:

The point where I am particularly concerned about low earners is that there are two forms of tax relief and roughly half of the auto-enrolment schemes follow the net pay system of tax relief. It is great for medium and high earners; it has a particular disadvantage for low earners, in that somebody who is not a taxpayer in a net pay scheme, so an individual earning below £12,500 does not get tax relief. At worst, for somebody at £12,500, that costs them £64 per year. The way that tax system works, that is £64 out of their take-home pay, an amount of money that might pay for a child’s school uniform, for instance. It is just a quirk of the tax system that those in relief at source schemes get those, and those in net pay schemes are denied that. We have pushed the Treasury hard on this and we will continue to push hard on it.125

132.The Minister for Pensions and Inclusion and the Economic Secretary to the Treasury told us that the Government had consulted on the net pay versus relief at source arrangements at the 2015 Summer Budget and found there was no clear consensus for reform. They said that in 2016/17 there were 1.33 million people with earnings below the personal allowance contributing into a pension scheme via net pay tax relief arrangements.126

133.The difference between the two types of contribution has increased from up to £35 per year in 2018/19 to up to £65 per year in 2019/20 for those with earnings below the personal allowance and contributing to statutory automatic enrolment rates.127 The Economic Secretary to the Treasury told us that “The dilemma we have is that if you look at the total amount of money we are talking about here, which is about £100 million, it would cost about £10 million to administer that.”128

134.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 significant sums through decisions they did not make.

135.We recommend that the Government resolve the discrepancy between net pay and relief at source tax relief arrangements as a matter of urgency.

73 DWP, Pensions Dashboards, Working together for the consumer, December 2018

74 HM Treasury, Budget 2016, HC 901, March 2016, para 1.114

75 HC Deb, 21 May 2018, vol 641, col 554 [Private Pensions: Windsor]

76 HM Treasury, Budget 2016, HC 901, March 2016, para 1.114

77 DWP, Pension freedoms, Government response to the Committee’s Ninth Report, Tenth Special Report of Session 2017–19, 20 June 2018, p7

78 The Times, Esther McVey ‘wants to kill off’ online pension tracker, 17 July 2018

79 Defined Benefit pensions white paper, Q210

80 Letter from Association of British Insurers to the Chair, 17 July 2018

81 New Model Adviser, Pensions minister tells ‘laggards’ to get ready for the dashboard, 19 October 2018

82 Q43

83 Q41