3Empowering savers to choose
32.Default decumulation pathways and allowing NEST to offer decumulation products will go a long way to guiding the most disengaged savers towards suitable pensions. Such pathways should act as a backstop. Ideally, individuals should be engaged in saving and retirement planning, before shopping around for the pension income product best for them. In this chapter, we consider measures the Government could take to encourage greater engagement.
Supporting pension planning
Mid-life MOT
33.In our report on pension scams we argued that a default impartial guidance appointment immediately prior to accessing a pension pot would result in better consumer outcomes.74 But greater engagement earlier in life is necessary to ensure people have pension pots worth seeking guidance on. Promoting this engagement remains a big challenge.75 Which? research in 2016 found 47% of employed people aged over 50—those closest to retirement—with a personal pension were not confident they knew how much they had in their pension pot. 21% said they had never checked how much they have saved in total.76 The pensions industry should bear some responsibility for this. Hargreaves Lansdown said the industry had “historically been very poor at engaging with customers”.77 Royal London said engagement often came too late, after consumers had decided what to do.78
34.Andrew Seagar, Head of Service Development at Citizens Advice, told us the key to increasing early engagement was “to get people talking about pensions as a social norm”, regarding retirement as a “life event” to be planned for, “like having a baby or starting work”.79 He called for the introduction of a mid-life MOT, under which individuals would review their financial health at an age when it was still possible to take reparative action such as increasing pension contributions.80 This idea has gained prominence since it was recommended by John Cridland’s Independent Review of the State Pension Age.81 Aviva and Age UK, a charity, agreed that an MOT at age 50 would be appropriate to trigger engagement with pensions.82
35.We did not hear convincing evidence, however, that engagement with mid-life MOTs themselves would be adequate. The experience of Pension Wise, the public guidance service set up to accompany pension freedoms, is that few people actively seek out free and impartial guidance, even at the point of retirement.83 It seems unlikely that take-up would be any higher for a mid-life MOT when drawing a pension is a more distant prospect. Under the default guidance system we recommended, a person would need to have a guidance appointment, or actively opt out, before being granted access to a pension pot. There is no obvious comparable mechanism for encouraging take-up of mid-life guidance. The people most likely to book a mid-life MOT would be those who are already engaged with their retirement planning.
36.There is a clear consensus on the need to increase consumer engagement with pensions well before retirement. A mid-life MOT at age 50, giving someone time to reassess their approach to retirement saving, is a good idea. Where firms and providers are open to providing such an option, this is to be welcomed, and we would encourage individuals to make use of them. Experience suggests, however, that take-up will be mediocre at best, and there is no obvious mechanism for nudging people towards them. The introduction of mid-life MOTs should not be mistaken for something likely to have a transformative effect on consumer behaviour.
Pension passports
37.Pension providers are required to issue “wake-up packs” to members between four and six months before their intended retirement date.84 These communications are intended to inform members of the value of their pot and prompt them to engage with decumulation options before retirement, including through signposting to free, impartial guidance.85 We heard, however, that they were rarely read in detail.86 Baroness Altmann, a former Pensions Minister, told us this was hardly surprising: they could run to 40 or more pages long and were “guaranteed to send you to sleep”.87 Incumbent providers of course benefit from any customer inertia that results.
38.The Behavioural Insights Team, which seeks to apply behavioural science to policy, has, on behalf of Pension Wise, trialled single page “pension passport” summaries.88 A personalised, single page pension passport used instead of a wake-up pack by Liverpool Victoria, a pension provider, led to a statistically-significant 10% increase in the number of people visiting the Pension Wise website and a statistically-significant 3.5% increase in calls to the Pension Wise booking line.89 Retirement Advantage, a pension provider which had “championed the introduction of simpler retirement ‘wake-up’ packs for many years”, said the trial results showed that one-page passports should be “adopted as the norm”.90 Baroness Altmann similarly called for “simple, standardised statements”.91
39.Pension wake-up packs currently do nothing of the kind. This is no surprise: incumbent pension providers have little incentive to rouse their members from slumber. Pension passport trials show that simplified, one-page communications can increase member engagement with their pension options. Such simple and easily achievable improvements can complement more ambitious digital measures. We recommend that the FCA and The Pensions Regulator (TPR) require all pension providers to issue one-page pensions passports as part of their pre-retirement communications with members. The FCA and TPR should work together to produce a template best practice passport by June 2018.
Pensions dashboard
40.On average, a UK adult can now expect to have 11 jobs in their lifetime. With the advent of AE, they will have a similar number of pensions.92 Currently, it is incumbent on the individual to monitor each of those pensions, as well as their state pension and DB pension entitlements, separately. A pensions dashboard would bring all that information together on one digital platform.
41.Countries including the Netherlands, Australia and Sweden already have pension dashboards.93 The ABI told us that internationally “a common theme across all dashboards has been the increased level of engagement with pensions”.94 Royal London argued that, owing to the “fragmented pension system”, the need for a UK dashboard is “arguably much stronger” than in those countries.95
Progress so far
42.The concept of pensions dashboards has broad support across industry and Government.96 Progress towards their creation has, however, been pedestrian. Two previous reports by this Committee called for the introduction of a dashboard, with the latter, the October 2015 report on pension freedoms, stating it was “long overdue”.97 The Government response to that report said that any dashboard should be “industry led”.98 The ABI reported in October 2017 that a prototype project had confirmed there were no major barriers to the creation of pension dashboards in the UK.99 The DWP is currently working on a “feasibility study to explore how best to approach pensions dashboards” and aim to report their findings in spring 2018.100 These will seek to resolve outstanding questions of how UK dashboards will function. The Government remains committed to ensuring that the industry introduces dashboards by 2019.101
Mandating participation
43.There is broad agreement that the success of dashboards is dependent on them including information on the full range of pensions.102 DC schemes necessarily know the size of any individual’s pot. State pension forecasts are now available online and Guy Opperman MP, the Pensions Minister, said that the state pension would be a “key component of any dashboard”.103 There are concerns, however, that some DB schemes, especially small legacy schemes set up long ago, may struggle to provide the necessary information in a digital format.104 Michelle Cracknell told us that there is a “huge fragmentation” and providing data for a dashboard would require a “colossal amount of tracing”.105 However, most DB pensions are held in larger schemes; out of around 5,700 private DB pension schemes, schemes with more than 1,000 members account for 91% of all members and schemes with more than 10,000 members account for 63%.106
44.The PLSA said it was “questionable” whether all schemes would participate in a dashboard voluntarily, and therefore the provision of information should be compulsory.107 Royal London called for legislation to make supplying data mandatory.108 Which? favoured legislation to mandate the provision of information, but conceded that an extension to the 2019 timetable may be required for some DB schemes.109 Similarly, TPR argued that compulsion would be necessary but that a “’phased’ approach” similar to the timetabling used for AE would be the best way of maximising compliance.110 The Pensions Minister said in December 2017 that there was “growing evidence for some form of compulsion to bring about a complete dashboard in a reasonable timeframe”.111
Who provides the dashboard
45.There is strong support for a public dashboard hosted by the new single financial guidance body (SFGB) that will come into force in October 2018.112 Despite a preference for “industry led” dashboards, the Pensions Minister recently said “it is very possible” the SFGB will ultimately run a dashboard when it is fully operational.113 Such a dashboard, free from commercial pressures, would provide individuals with a trusted source of information about their pensions. This would be in line with the examples of Australia, where a single dashboard is hosted by the Australian Tax Office, and Sweden, where the only dashboard is run by a public-private partnership.114
46.Aviva argued that pension providers would be best placed to deliver dashboards as they could signpost their members to them, making it “more likely that they will take appropriate action”.115 The ABI said that multiple dashboards would drive innovation and encourage third parties to offer additional tools, products and services, leading to greater consumer engagement.116
47.It is unclear, however, what innovations in dashboards would consist of and how they would be to consumer benefit. Dashboards should first and foremost provide consumers with accurate and impartial information about all their pensions in one place. In a multiple dashboard system, providers would have incentives to use their dashboards to promote their own products or otherwise discourage switching away.117 There is also a danger that dashboard providers could use different underlying assumptions, producing rival income projections from the same raw data.118 The pension dashboard was conceived as a means of empowering consumers to promote competition in the product market. There is a risk that, in a multiple dashboard system, providers could instead compete on the information provided.119 Which? and the ABI argued that regulation would be necessary to ensure that dashboards were consistent.120 There is a simpler solution.
48.By providing information on all pension entitlements in one place, the pensions dashboard will be a vital tool in informing and engaging customers and empowering them to exercise pension freedoms in their own interest. The Government’s commitment to introducing it by 2019 is welcome.
49.The case for a publicly-hosted pensions dashboard is clear cut. Consumers want simple, impartial, and trustworthy information. Armed with such information, they will be more empowered to exercise choice in the decumulation product market, driving competition and consumer benefit. 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 between pension providers over the presentation of the same information risks detracting from, 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 dashboard. 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.
50.For a dashboard to succeed in its objectives, it needs to include the full range of pensions: state, DC and DB. While we acknowledge the challenges faced by some DB schemes in getting their systems in order, it is essential that they participate. We recommend the Government mandate all pension providers to provide necessary information to the pensions dashboard. To enable smaller legacy DB schemes sufficient time to comply, we recommend that Government consult with TPR on an implementation timetable. This should ensure that at least 80% of all DB pensions are visible on the dashboard by April 2019, with the remainder to follow.
Advice
The value and take-up of advice
51.Most people are not required to receive regulated financial advice before exercising pension freedoms. Currently, advice is only mandatory if the individual wishes to give up safeguarded benefits, such as a DB pension, worth over £30,000. Our report on the British Steel Pension Scheme highlighted how receiving regulated financial advice on transfers out of DB schemes did not necessarily result in better outcomes for consumers.121 More generally, however, there is evidence that consumers are better off seeking advice before accessing their pension. Research by the International Longevity Centre found that people who sought financial advice between 2001 and 2007 had, by 2012 to 2014, increased their wealth by £27,664 more on average than those who had not received financial advice.122 Those who take advice seem to value it. Respondents to a December 2016 PLSA survey who had taken advice were unanimous in finding it “helpful”.123 LEBC The Retirement Adviser, an independent advice firm, said that only 2% of recipients acted contrary to the advice they received.124
52.Most people who have exercised pension freedoms have not, however, taken up financial advice. The PLSA found that 32% of individuals accessing their pots under pension freedoms paid for regulated financial advice.125 The FCA found that the proportion of drawdown products bought without advice has risen from 5% before the introduction of pension freedoms to 30% afterwards.126 63% of all annuity sales in the year to September 2016 were made to non-advised customers.127
The advice gap
53.There is a significant correlation between an individual’s pension pot size and the likelihood of them seeking financial advice. While 89% of people with pots worth over £500,000 sought advice, this was true of just 20% of individuals with a pension pot of less than £10,000.128 Sir Steve Webb said that those figures showed “exactly what you would both want and expect, which is people with serious amounts of money are taking advice and people with very small amounts of money on the whole are not”.129 Whilst he accepted that “what we definitely need is more advice” he felt that “there is a risk that we understate the extent to which the system is broadly working”.130
54.Others witness warned, however, that the “advice gap”, whereby consumers are unable to get advice at a price they are willing to pay, needs to be tackled.131 Advice is perceived as expensive,132 though as the FCA found that 51% of people would not be prepared to pay for advice at any price, it is not the only barrier.133 A widespread lack of trust in financial advisers,134 and a lack of engagement with pensions contribute to this effect.135 Advisers may also turn away potential clients if advising them is not likely to be profitable.136
Automated advice
55.Automated advice is provided through technology rather than face-to-face appointments. The 2016 Financial Advice Market Review (FAMR) found it could have “a key role to play in reducing the cost of advice and developing new ways to engage consumers.”137 The FCA subsequently created a dedicated unit to support the development of automated advice models.138 Their evidence referenced a firm offering automated advice model for a fixed charge of £10, in comparison to their average face-to-face charge of £150 per hour.139 Liverpool Victoria has also developed an online, fully regulated advice service for £199, a significantly cheaper option than most financial advisers.140
56.Which? supported the role that automated advice could play but said its success was dependent on consumer acceptance. Their research suggested 58% of people would not currently want to accept an advice recommendation from a computer.141 Key to combating such concerns is assurance that a reduction in cost is not at the expense of quality. The FCA was unable to point to any explicit examples of comparisons they have done between automated and face-to-face advice, although they stressed that quality requirements remained the same, regardless of the advice channel.142
57.Financial advice will not be for everyone, particularly those with the smallest pots, but more people would benefit from accessing high quality, independent advice before deciding how to invest their life savings. There is a clear role for automated services in providing cheaper advice. Public scepticism as to whether it is reliable and trustworthy must first, however, be addressed. This is best done through empirical evidence. We recommend the FCA conduct and publish a review comparing consumer outcomes from face-to-face and automated advice.
Informed customers and advice
58.Access to free, impartial guidance helps encourage people to seek out financial advice as a next step. DWP research found that 49% of Pension Wise customers spoke to a financial adviser, tax adviser or accountant in the three to four months following their appointment, compared to 20% who did not have a guidance appointment.143 This reinforces the potential benefits of default guidance. A pensions dashboard, creating more confident and informed customers, might be expected to have the same effect. By offering a single source of accurate and comprehensive data, it may also drive down the cost of providing advice.144
59.Informed and confident savers are more likely to take up financial advice. More generally, they are more likely to shop around and take sound financial decisions about their retirement. A system of default decumulation pathways will protect consumers who do not engage with their pension saving. 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. Measures such as default guidance, a pensions dashboard and a more varied advice market could be vital in ensuring that savers are equipped to exert that competitive pressure.
74 Work and Pensions Committee, Protecting pensions against scams: priorities for the Financial Guidance and Claims Bill, third Report of Session 2017–19
81 John Cridland, Independent Review of the State Pension Age, March 2017
83 Our previous report on pension scams sets out the poor take-up of pension wise, Protecting pensions against scams: priorities for the Financial Guidance and Claims Bill, third Report of Session 2017–19
84 Wake-up packs are formally known as open market options statements. FCA Handbook: Conduct of Business Sourcebook COBS 19.4.5–8
85 FCA Handbook: Conduct of Business Sourcebook COBS 19.4.5–8
88 The Behavioural Insights Team, Improving engagement with pensions decisions: The results from three randomised controlled trials, October 2017
89 Ibid.
92 DWP, Thousands more make contact with long lost funds, May 2014
93 Royal London, Pensions Dashboards around the World
96 E.g. PLSA (PFC0078); Financial Services Consumer Panel, (PFC0059); Personal Investment Management & Financial Advice (PFC0035); DWP, (PFC0076)
97 Work and Pensions Committee, Fourth Report of Session 2014–15, Progress with automatic enrolment and pension Reforms, para 108; Work and Pensions Committee, First Report of Session 2015–16, Pension freedom guidance and advice, para 39
98 HM Treasury, Pension freedom guidance and advice: government response to the Work and Pensions Committee’s first report of session 2015–16, para 2.23
99 ABI, Pensions Dashboard Project; Reconnecting people with their pensions, October 2017
101 Ibid.
103 Guy Opperman MP, Pensions Dashboard Development Day, December 2017
106 Based on schemes eligible for the Pension Protection Fund (PPF). See PPF Purple Book 2017, fig. 2.2.
111 Guy Opperman MP, Pension Dashboard Development Day speech, December 2017
112 Subject to the passing of the Financial Guidance and Claims Bill
113 HC Deb 01 February 2018 col 23 [Financial Guidance and Claims Bill Commons Committee Debate]
114 Royal London, Pensions Dashboards around the World
120 Which?, (PFC0086); ABI, Pensions Dashboard Project; Reconnecting people with their pensions, pp.5–6
121 Work and Pensions Committee, Sixth Report of Session 2017–19, British Steel Pension Scheme, HC 828, February 2018
122 ILC-UK, The value of financial advice, July 2017
127 FCA, Retirement Outcomes Review Interim Report, p35
128 FCA, Retirement Outcomes Review Interim Report, p35
130 Q39 and Q37 (Sir Steve Webb)
132 Which?, (PFC0036). See also findings of the FCA’s Financial Advice Market Review
133 FCA, Financial Advice and Guidance: Quantitative research to inform the Financial Advice Market Review, p.12
135 Work and Pensions Committee, Protecting pensions against scams: priorities for the Financial Guidance and Claims Bill, third Report of Session 2017–19
136 FCA, Financial Advice Market Review Final Report, p. 8
137 FCA, Financial Advice Market Review Final Report, p. 39
143 DWP, Pension Wise service evaluation, p. 32
Published: 5 April 2018