Pension freedoms have rightly given people the choice of what to do with their own savings. Individuals can choose a retirement income product that offers the right mix of access to cash, security and investment returns for them. Pensions can, however, seem distant and daunting. Faced with bewildering complexity, many people simply switch off.
Automatic enrolment has been a huge success in saving, bringing millions of people into workplace pensions for the first time. The same nudge techniques that lie behind that success could be applied at retirement to guide people towards suitable options, while retaining the full freedom to choose.
There is little evidence that savers are frivolously squandering their life savings. But that does not mean that people are making well-informed pension freedom decisions in their own interest. Too many people are withdrawing their pension pots in full to leave them resting in low interest cash bank accounts. We are also concerned by large numbers of people buying drawdown products—which carry investment risk and can run out—without fully understanding the consequences. Consumers who do not take financial advice on drawdown tend to take whatever they are offered by their incumbent pension provider.
This report aims to create a pension freedoms market that works better for consumers. We have taken a two-pronged approach. First, we have sought to protect savers who do not—or cannot—engage with their pension choices. Second, we have sought to empower more consumers to make active decisions.
There is a philosophical difference between the Government’s approach to the accumulation (saving) and decumulation (receiving) phases of a pension. Automatic enrolment has been a tremendous success by defaulting people into pension saving. Accumulation, as a result, is largely passive. In the decumulation phase, however, individuals must take an active choice of what to do with their savings. The Government hoped that a competitive and innovative market would meet consumer needs. There is little evidence of this: too many drawdown customers are not shopping around and do not understand their options. They are reliant instead on getting a good deal from their existing provider. The success of automatic enrolment in overcoming market failure in the accumulation phase offers a template for strengthening pension freedoms. We recommend every pension provider offering drawdown is required, by April 2019, to offer a default decumulation pathway suitable for their core customer group. These would be subject to oversight by existing Independent Governance Committees and subject to the same 0.75% charge cap already in place for accumulation in automatic enrolment. People would still be free to choose to invest and spend their own money as they wished. But if they did not make an active choice, they would move into a suitable and regulated default product.
NEST, the government-backed pension scheme set up to support automatic enrolment, is not yet able to offer decumulation products. Its five million members, which include many on low incomes saving for the first time, should not be the only ones compelled to shop around for suitable retirement products. We recommend that the Government allows NEST to provide decumulation products, including a default drawdown pathway, from April 2019. Rather than impeding a market that is hardly functioning well, evidence from automatic enrolment suggests that NEST may drive better retirement outcomes by forcing other providers to offer greater value or risk savers switching over to NEST to get a better retirement deal.
In earlier reports, we recommended a free and impartial guidance appointment as default before people access their pension pots. People who have taken guidance are more likely to then take independent financial advice. This is a wise choice for many, but can be expensive for those with smaller pension pots. Technological innovation has a clear role in filling that gap. We recommend the Financial Conduct Authority report on outcomes from automated advice, with a view to reassuring potential customers that it can be a useful service.
Sent shortly before retirement, pension “wake-up” packs currently do nothing of the kind. This is no surprise: incumbent pension providers have little incentive to rouse members from slumber. Trials show that single page pension passports increase consumer engagement with pensions options. We recommend that pension providers are required to issue them.
By providing information on all pension entitlements in one place, the pensions dashboard, which Government has promised by 2019, will be a vital tool in informing and engaging customers and empowering them to exercise pension freedoms in their own interest. We recommend that all pension providers are mandated to provide necessary information to the pensions dashboard, with a staged timetable to enable smaller legacy defined benefit schemes time to comply.
The case for a publicly-hosted pensions dashboard is clear cut. Consumers want simple, impartial and trustworthy information. The case for multiple dashboards hosted by self-interested providers is far less convincing. This would add complexity to a problem crying out for simplicity. Competition over the presentation of the same information risks detracting, or even acting counter to, competition over the quality of pension products. Rather than regulating the dashboards into consistency, it is far simpler just to have one. We recommend that the Government introduces a single pensions dashboard, hosted by the forthcoming new single financial guidance body, funded by the industry levy and in place by April 2019.
Informed and confident savers are more likely to shop around and take sound financial decisions about their retirement. A system of default decumulation pathways will protect disengaged consumers. But the real prize is a properly functioning pension freedom market which offers suitable and good value pensions for more people. This can be driven by a virtuous cycle of better-informed customers switching providers and demanding cost-effective products. Default guidance, a more varied advice market and a pensions dashboard will be vital in ensuring that savers are equipped to exert that competitive pressure.
Published: 5 April 2018