Conclusions and recommendations
The effects of pension freedoms
1.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. (Paragraph 9)
Protecting savers
2.Pensions can seem distant and daunting. Faced with bewildering complexity, many people simply switch off. By harnessing that disengagement to default people into pension saving, automatic enrolment has been a tremendous success. Accumulation of a DC pension can be passive. Decumulation of that pension, however, is currently active: individuals must actively choose 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 for investing their savings. 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 in the decumulation phase. 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. (Paragraph 21)
3.We recommend 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. Similarly, the remit of Independent Governance Committees to scrutinise value for money in the accumulation phase should be extended to default decumulation products. These protections should be in place by April 2019. (Paragraph 22)
4.NEST is a growing success story. It has more than five million members, including many on low incomes, each embarking on private pension saving. Under the existing framework, all those members will be required to take active decisions about their life savings at retirement, many after a career of passive saving. NEST is currently highly restricted in the support in can offer those members at retirement as it cannot offer decumulation products. Concerns that allowing NEST to offer such products would hinder competition in the market would carry greater weight were there evidence of a functioning market currently. Indeed, the evidence from automatic enrolment suggests 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. (Paragraph 30)
5.We recommend that the Government allows NEST to provide decumulation products from April 2019, provided it remains assured of NEST’s ability repay its start-up loan. This should include establishing a default drawdown pathway, in line with our wider recommendation. In keeping with the spirit of pension freedoms, savers would remain entitled to move their money wherever they wished. (Paragraph 31)
Empowering savers to choose
6.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. (Paragraph 36)
7.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. (Paragraph 39)
8.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. (Paragraph 48)
9.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. (Paragraph 49)
10.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. (Paragraph 50)
11.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. (Paragraph 57)
12.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. (Paragraph 59)
Published: 5 April 2018