4Default guidance
Pension Wise
24.Pension Wise provides free and impartial guidance about defined contribution pension choices.63 It was set up in 2015 as part of the pension freedoms reforms. Guidance appointments are provided over the phone by TPAS and face-to-face by Citizens Advice. There is also a Pension Wise website. Pension Wise explains the various options, their tax implications and the most important things to consider when planning for retirement. It does not recommend specific companies or products, which falls into the domain of FCA-regulated financial advice.
25.An evaluation of Pension Wise between February 2016 and January 2017 painted a healthy picture of the performance of the appointment service:
- Satisfaction is high: 94% of people who completed an appointment were satisfied.
- It is effective in informing customers: 93% felt informed of their pension options following an appointment, compared with 56% of a control group who had not used the service.64 People were also more likely to feel confident in dealing with scams after an appointment.
- Appointments prompt desirable behaviour: customers were much more likely to take actions such as consulting a financial adviser and shopping around for quotes.65
Take-up of guidance
26.Use of the service has risen. There were 61,000 Pension Wise appointments in 2015–16, 66,000 in 2016–17 and 40,000 in the first half of 2017–18.66 Compared to the number of people who may benefit from the service, however, take-up of appointments remains low. Charlotte Clark, Director of Pensions at the Department for Work and Pensions (DWP), told us that “around 500,000 people” per year are exercising pension freedoms.67 An FCA survey found that one in eight 55-64 year olds who planned to retire in the next two years and who have a defined contribution pension had used the Pension Wise service in a 12 month period.68 Separate FCA research found that just 20% of customers accessing a pension pot had had a Pension Wise guidance appointment.69 Michelle Cracknell, Chief Executive of TPAS, said that while they were proud of the increased use of the service, “it is still only a small fraction of the people who should be taking guidance”.70
27.In response to concerns about take-up, the Government drew our attention to use of the Pension Wise website.71 It has received 5.7 million visits since it was launched and averaged 210,000 visits per month in the year to September 2017.72 Age UK cautioned, however, that it is “difficult to ascertain the nature of the online interaction”.73 Visiting the website is not equivalent to receiving guidance, and witnesses told us it was a poor substitute. Baroness Altmann said:
when you introduce pension freedom into a marketplace that has never really been encouraged to engage with pensions and mostly does not understand much about them, obviously you need an expert to help you.74
Just Group, an insurer, told us that “customers who receive guidance or advice from an impartial, independent professional will be better equipped to understand and navigate their options”.75 NEST said they were concerned “that people appear to be making decisions based solely on a read of the Pension Wise website”.76
28.The Pension Wise evaluation study found that both the appointment service and the website had a positive impact on people’s understanding and were often used in tandem. The benefits of appointments were, however, more marked. For example:
- 50% of customers who had completed an appointment felt “very well informed” about their options compared with 32% of who had only used the website; and
- 53% of appointment customers felt “very confident” about being able to avoid pension scams, compared with 39% of those who had only used the website.77
Advertising and signposting
29.The two main existing means of promoting Pension Wise are advertising and signposting by pension providers. The Pensions Minister told us that “advertising is a great way of reaching those people who are less engaged” and that “demand for Pension Wise has been very responsive to paid advertising”. The DWP had, however, cut the Pension Wise advertising budget by 10% to £4.5 million in 2017–18.78 The Minister told us that a January 2017 TV campaign had “delivered record numbers of appointments in both February and March”.79 Appointment levels had, however, fallen significantly since then (from 8,600 in March 2017 to 6,637 in September 2017) and in the context of the numbers of people exercising pension freedoms, such boosts are relatively small. Zurich Insurance said that advertising had “not had a significant impact on take-up”.80 TPAS told us that “people seek guidance at different life events”, such as a divorce, bereavement or change in employment status, rather than reacting to advertising.81
30.Pension providers are required to inform members of the availability of pensions guidance (known as “signposting”) at various stages of the pension freedoms decision process:82
- between four and six months before the intended retirement date, the scheme member must be sent a “wake-up pack”,83 including among other documents a “clear and prominent statement” signposting to free, impartial pensions guidance alongside a recommendation to seek appropriate guidance or advice;84
- a reminder, six weeks before the client’s retirement date;85
- further signposts to Pension Wise when they communicate with clients about their decumulation options or about facilitating access to pension savings;86 and
- if appropriate, a further signpost to guidance as part of risk warnings when the client has made a decision to access pension savings.87
31.Christopher Woolard, Director of Strategy and Competition at the FCA, told us that signposting prompts were “being given well by firms”.88 Other witnesses, however, expressed scepticism about the efficacy of this system. Just Group said that “passive, written disclosures” had limited behavioural impact.89 NOW:Pensions, a master trust, told us that “consumers often do not read communications from their pension provider in detail” and therefore “a large proportion of our members are not aware of the existence of Pension Wise or of the services that it offers”.90 Baroness Altmann told us that wake-up packs were “guaranteed to send you to sleep”, as they could run to 40 pages or more.91
32.Effective signposting to an impartial guidance service is invariably contrary to the business interests of the pension provider, as they benefit from customer inertia. Baroness Altmann told us that providers had been “quite good at pretending they are trying to pass people on”, but they understandably wanted customers to “call their own hotline and buy their own products”.92 She said that by mixing details of the company’s own hotline with the signpost, providers could “capture” customers who “think they have had the free help and they don’t even bother with Pension Wise”.93 Just Group told us that investment by providers in customer information had “placed customer retention ahead of any intent to improve awareness and decision making”.94
The effects of low take-up
33.Pension Wise was created to support people in choosing how to exercise their pension freedoms. It is particularly important for those who are unable or unwilling to pay for financial advice. The FCA has found little evidence of frivolous squandering of savings on consumer goods, but has found that people are taking decisions apparently contrary to their self-interest.95 Christopher Woolard told us that, in choosing to take their principal pension into a drawdown scheme, people who do not take guidance “tend to default simply to the person they have saved with”. He said that, by failing to consider other providers, “they are not frankly getting the best value for money they can for their retirement”.96
34.One worrying development is people moving their savings from pensions to low-interest bank accounts or cash ISAs. The FCA found that, in 2015–16, more than half (52%) of people who withdrew pension pots in full did this. In doing so, they would potentially forgo investment returns, employer contributions and tax relief and possibly incur disadvantageous income tax and inheritance tax treatment.97 The rate was highest (64%) in the youngest 55–59 age group.98 Pension provider Fidelity International told us this behaviour was “irrational” and Hargreaves Lansdown, an investment service, said it “should be a major cause for concern”.99 The FCA found that the trend was “motivated in part by a lack of trust in pensions”.100 The consumer charity Which? told us that low trust and consumer engagement in pensions meant that people “often struggle to make the right decisions about their pensions”.101 The FCA said people often took the decision to put their pension in a bank account “without turning to their provider or Pension Wise for help”.102
35.We also heard that the problem of people making poor and unsupported decisions about their pension savings could get worse. The FCA found that just 3% of consumers who had withdrawn their defined contribution pension pot relied on it as their most significant source of retirement income.103 People currently aged over 55 are far more likely than upcoming generations to have a final salary pension.104 The advent of pensions auto-enrolment has led to a massive increase in the number of workers saving into a workplace defined contribution pension.105 Otto Thoresen, Chairman of NEST, the state-backed workplace pension provider, told us that current circumstances were “a false position” because people currently exercising pension freedoms tended to have multiple sources of income.106 As people increasingly rely on defined contribution pensions for income in retirement, making good and well-informed choices about those savings will become ever more vital.
36.Pension Wise guidance is greatly valued by those who use it, but it is not reaching enough people. There are signs that take-up of guidance is increasing but this is from a very low base. While the Pension Wise website is a valuable resource, it is no substitute for a conversation with an expert. The existing promotion regime of signposting by pension providers—who have no business interest in promoting the service—and advertising has proved insufficient. Far too many people are currently taking vital decisions in the dark, putting them at greater risk of suffering irrevocable financial detriment through scams or choices contrary to their interests. As ever greater numbers of auto-enrolled savers approach retirements during which they will rely on defined contribution pots for retirement income, the need to boost engagement with pension guidance will grow increasingly acute.
The case for default guidance
37.Numerous witnesses told us that the key to increasing use of Pension Wise guidance was making it a social “norm” for individuals to engage with their retirement options. TPAS said that this was a change from people “being recipients of pensions to consumers of financial services”.107
38.We heard that making guidance appointments mandatory, or close to it, at the point of accessing saving would be off-putting and counterproductive. Hargreaves Lansdown told us that making Pension Wise mandatory “would cause widespread anger and dissatisfaction with the pension system”.108 Ben Franklin, Head of Economics and Ageing at ILC-UK, said that “mandatory education can cause disengagement and resistance”.109
39.Automatic enrolment has been extremely successful in bringing employees into defined contribution pension saving. It is not compulsory, but individuals are required to opt-out if they do not wish to participate.110 Citizens Advice argued that pension guidance should become “a default part of the pension consumer journey” in a similar way. They characterised this as a “strong nudge”.111 Michelle Cracknell told us that arranging a guidance appointment by default could result in substantial behavioural change:
the individual is more likely to change the time of the appointment rather than cancel it. [ … ] All the behavioural science says that if you automate it then people will go and have that appointment.112
40.Age UK advocated a system in which “savers would be unable to access their pension unless they either had a Pension Wise appointment, took regulated advice, or actively decided they did not want either”.113 A wide variety of other witnesses called for this kind of approach.114 LV=, a friendly society, told us that, without a “bold move” to increase shopping around, “retirees will keep missing out on getting the most from their retirement savings”.115 TPAS, which provided telephone Pension Wise appointments, said that “such a service could be delivered at a very affordable cost.”116
Clause 5(2) of the Financial Guidance and Claims Bill and our proposal
41.Clause 5(2) of the Financial Guidance and Claims Bill was introduced as an amendment by Lord Starkey, who described it as a “final nudge” to guidance.117 It requires the pension scheme, before granting access to a pension pot, to ask the member whether they have taken Pension Wise guidance. It also enables the FCA to require the pension scheme to set up an appointment in certain circumstances.118
42.Though the Government opposed the original amendment, the Pensions Minister told us that the Government accepts the principle of a “slightly harder nudge” than the present “soft nudge” and is “working on the fine detail”.119 He said that officials were engaged in “a genuine consideration of how far we go to make sure we have the appropriate nudge that gets the maximum possible take-up”.120
43.The Pensions Minister said that the Government was “not totally convinced” that the wording of Clause 5(2) is “ultimately as it should be”.121 During debate on the amendment in the Lords, Baroness Buscombe noted that the consolidation of pension pots “can be a routine decision to consolidate pension pots to keep financial affairs simple”.122 There was a danger that adding friction to this administrative process could inhibit the engagement of members with their pensions. Similar arguments could be advanced for enabling access to pension pots of trivial value, or in instances when the scheme member has already taken relevant guidance or financial advice.
44.The Pensions Minister noted that Clause 5(2) does not require the pension scheme member to either take up an appointment or explicitly decline it.123 It would require an appointment to be arranged in certain circumstances, but that appointment could be ignored. Opting out could be passive rather than active. Just Group proposed a system in which individuals would be given a verification code enabling access to their pension pot if they had either had a guidance appointment or explicitly had declined one after successive prompts by the provider.124
45.Clause 5(2) of the Financial Guidance and Claims Bill seeks to give a much-needed nudge towards greater take-up of Pension Wise guidance appointments. We welcome the Government’s acceptance that this is the right direction of travel, subject to fine tuning. The Clause as it stands falls short of default guidance as it does not require individuals to participate or expressly turn the down opportunity before being granted access to their pension pot. Opting-out could be passive. It also risks making routine transactions, and those in which the individual has already taken advice, unnecessarily cumbersome.
46.We recommend that Clause 5(2) of the Financial Guidance and Claims Bill be strengthened to ensure that an individual receives or expressly refuses guidance before being granted access to a pension pot. The details of what constitutes a choice not to receive guidance should be set out in Financial Conduct Authority rules, following public consultation. So too should the details of appropriate exemptions in instances where:
- the pot concerned is of low value;
- the individual has already received guidance or advice; or
- the transfer in question is a routine consolidation of pots.
The Government should use its existing powers to place equivalent requirements on trust-based defined contribution pension schemes. These measures would establish a proportionate system of default guidance on pension freedoms, promoting shopping around, better-informed decision-making and protection against scams. Our proposed amendment is shown at the end of this report.
63 The Financial Guidance and Claims Bill intends to set up a new Single Financial Guidance Body which will merge Pension Wise, the Pensions Advisory Service (TPAS) and the Money Advice Service (MAS). In this report we use “Pension Wise” as shorthand for free, impartial and publicly funded guidance on defined benefit contribution pension choices, regardless of how it is subsequently branded.
64 A finding confirmed by a test of true or false responses to factual questions.
65 DWP, Pension Wise service evaluation: full year findings of customer experiences and outcomes of using the Pension Wise service, October 2017 (research conducted by Ipsos MORI)
66 Q134 (Charlotte Clark), 15 November 2017. The precise figures are 60,907 in 2015–16, 66,174 in 2016–17 and 40,366 in the first six months of 2017–18. Source: Pension Wise dashboard.
68 FCA (October 2017), Understanding the financial lives of UK adults: Findings from the FCA’s Financial Lives Survey 2017, page 44 and table 6.5
69 Written evidence from the Financial Conduct Authority (PFC0083). Estimate based on 143,752 pension pots accessed by consumers for the first time in the third quarter of 2016 (source: FCA Retirement Outcomes Review Interim Report July 2017), 13,990 Pension Wise appointments completed in this period, and an average of two pots accessed per individual.
72 https://www.gov.uk/performance/pension-wise , accessed November 2017
77 DWP Pension Wise service evaluation: full year findings of customer experiences and outcomes of using the Pension Wise service, October 2017, page 26 (figures 18 and 19)
78 Letter from Guy Opperman MP re further evidence to the Pension freedom and choice inquiry, 16 November 2017
79 Ibid
82 FCA rules under the Financial Services and Markets Act 2000 section 137FB, as inserted by Pension Schemes Act 2015 c. 8 Sch. 3 para. 6. TPR makes equivalent requirements of trust-based defined contribution schemes under The Occupational and Personal Pension Schemes (Disclosure of Information) (Amendment) Regulations 2015 (under powers conferred by Pension Schemes Act 1993 amended by Pensions Act 1995).
83 Formally known as a “open market options statement”.
84 FCA Handbook: Conduct of Business Sourcebook COBS 19.4.5–8
85 FCA Handbook: Conduct of Business Sourcebook COBS 19.4.9
86 FCA Handbook: Conduct of Business Sourcebook COBS 19.4.16
87 FCA Handbook: Conduct of Business Sourcebook COBS 19.7 Retirement risk warnings
97 FCA (July 2017) Retirement Outcomes Review interim report, para 1.18 (page 10)
98 FCA (July 2017) Retirement Outcomes Review interim report, figure 2 (page 8)
100 FCA (July 2017) Retirement Outcomes Review interim report, para 1.18 (page 10)
102 FCA (July 2017) Retirement Outcomes Review interim report, para 1.18 (page 10)
103 FCA (July 2017) Retirement Outcomes Review interim report, para 1.14 (page 8)
104 ONS, Annual Survey of Hours and Earnings pension tables, UK: 2016 provisional - table P1; see also Q161–2 (Charlotte Clark)
105 The number of members of defined contribution occupational pension schemes has risen from 2.1 million in 2011 to 10.9 million in 2016. Source: ONS Occupational Pension Schemes Survey 2016.
110 According to the 2016 DWP evaluation report, 6.87 million workers have now been automatically enrolled. DWP, Automatic Enrolment evaluation report 2016, December 2016
112 Q15 and Q20 (Michelle Cracknell)
114 For example, see Pensions Policy Institute (PFC0026) write-up of default guidance round-table. See also for example, Financial Services Consumer Panel (PFC0059), Which? (PFC0036), LV (PFC0023), Pensions Advisory Service (PFC0075)
117 HL Deb 31 October 2017 vol 785 col 1295 [Financial Guidance and Claims Bill Lords Report stage 2nd day]
118 HL Deb 31 October 2017 vol 785 col 1306–08 [Financial Guidance and Claims Bill Lords Report stage 2nd day]. The amendment was passed by 283 votes to 201.
122 HL Deb 31 October 2017 vol 785 col 1304 [Financial Guidance and Claims Bill Lords Report stage 2nd day]
7 December 2017