Finance (No.2) Bill

Written evidence submitted by Scottish Widows (FB10)

Response to Finance Bill Public Bill Committee Call for Evidence

Scottish Widows is part of Lloyds Banking Group, the largest domestic provider of financial services in the UK, and we are currently helping four million people with their retirement plans. We welcome the opportunity to provide a written submission to help inform the Public Bill Committee’s scrutiny of the Finance Bill – specifically the proposals regarding the increase of the Normal Minimum Pension Age (NMPA).

Scottish Widows welcomes the change announced on 4 November 2021, which closed the door on acquiring a new protected pension age (PPA) of 55. Had this been left open until April 2023, it would have undermined the policy intent of raising NMPA, while also causing market distortions and creating opportunities for scammers to exploit uncertainty.

However, we continue to hold the view that this legislation will confer PPAs to a large number of savers’ pots, creating additional complexity in retirement planning and undermining the intent of the increase.

Simplicity is a key driver of engagement with pensions. This is a critical element to consider when planning any changes to an already fiercely complicated system. "When can I access my money?" will no longer be a simple question as customers will inevitably have different pots with different pension ages. In fact, some customers may have different pension ages within the same pension pot.

Response to the Call for Evidence – Normal Minimum Pension Age
General points

1. We welcome November’s immediate changes to the implementation of the NMPA which stop scammers from exploiting uncertainty, and prevent market distortions as there are now no incentives to transfer purely to access a pension at age 55.

2. The average person has 11 jobs in their lifetime – with auto enrolment that could mean them having at least 11 pension pots. Some of these will now be accessible at age 55, others at 57.

3. The pension landscape has changed post auto enrolment and more people are now in DC schemes. It is now commonplace to transfer funds to consolidate pension funds. This means that the latest change to PPAs has an impact on a far greater scale than previous ones have had.

4. HMRC has promised guidance about what does and does not count as an unqualified right to access at age 55. Without this there is a risk of disputes that are not resolved for decades.

Treatment of individual transfers

5. The treatment of transfers of pensions with PPAs is a critical issue. It only takes two or more customers to constitute a block transfer – whereby the PPA would apply to the whole pot in the receiving scheme, including future savings.

In contrast, an individual transfer, as the Bill is currently drafted, will retain the PPA, but this will only apply to the funds transferred, not to other funds or future savings in the receiving scheme.

Therefore, if unchanged, this Bill will create the need to ringfence funds after an individual transfer – effectively turning one pension pot into two.

This will be the cause of significant complexity as customers will have a mixture of benefits within the same scheme, applicable at different times.

The Government previously rejected a different approach to NMPA, whereby only rights built up before 2028 would be protected, because it "would effectively split a pension scheme benefit into two parts and … would create unnecessary complexity for both individuals and schemes."

The need to ring-fence has the same effect and should also be rejected.

6. We recognise that there are good reasons why block and individual transfers might normally be treated differently – often block transfers are not initiated by the saver themselves and therefore require greater protection. However, in this case, the benefits of limiting protection for individual transfers are outweighed by the complexity that will be created.

7. Therefore, we propose that the Bill should be amended to bring the treatment of individual transfers in line with block transfers. When a customer transfers from a scheme with a PPA, that protection should be retained and should apply to the whole receiving pot, regardless of whether the transfer was an individual or block transfer.

Doing this will enhance the protection available for individual transfers to the customers’ benefit.

8. We acknowledge our earlier comment that increasing the usage of PPAs will ‘create additional complexity in retirement planning and undermine the intent of the increase’.

In this case, we would justify this position because there are already going to be a large number of customers with PPAs – and customers will soon realise that they simply need to find one ‘buddy’ to join them in transferring and they will be able to do a block transfer (retaining the PPA) - it is the cost of trying to retain as much simplicity as possible in the system for customers.

In addition, there is a loophole whereby a customer could transfer the contents of a ’57 pot’ to an existing ’55 pot’ which has a PPA, and then do the transfer in reverse to ensure all funds in what would have been a ’57 pot’ are now covered by the PPA.

That savvy customer, or one prepared to pay for private financial advice will benefit from the loophole whilst other consumers would not. It is always fairer to simplify and streamline a system.

Block transfers on or before 3 November 2021

9. As the Bill is currently drafted, subparagraph 5b, under section 23ZB appears to allow PPAs of 55 or 56 to be retained where block transfers were carried out on or before 3 November 2021. We want to draw attention to there being no clear start date applying this condition. Is it intentional that this will apply to all historic block transfers? If that is the case, it is disproportionate – perhaps even impossible where a ceding scheme no longer exists. Our view is that the policy intention of this condition was that this should only be applicable in the window between 11 February 2021 and 3 November 2021, and would advise that the Bill be amended to provide that certainty.

December 2021