Pension policy should focus more on ‘people’ than ‘pension pots’ says Ros Altmann

Work and Pensions Committee supports pension freedoms but urges Government, industry and Regulators to do far more to help consumers

Report suggests pension savers are left fumbling in the dark due to excessive complexity, disjointed regulation and insufficient guidance or advice

MPs rightly recommend that pension policy should be more about ‘people’ than ‘pension pots’

Recommendations include:

Government and Regulators need research and data on use of pension freedoms

Increase take-up of PensionWise guidance – new nudges are not enough

Increase access to independent advice and simplify advice allowance

Encourage providers to offer better new products for pension withdrawal and cap charges

Policy changes should be consistent with Regulators working together

Government and Regulators should urgently listen to excellent Work and Pensions Committee recommendations: The new Report from the Work and Pensions Select Committee contains an excellent critique of the workings of pension freedoms from the consumer perspective and has many important conclusions and recommendations that I hope Government and Regulators will accept. 

Individuals are being left fumbling in the dark trying to navigate pensions complexity and far more must be done to help pension customers benefit from pension freedoms: The MPs rightly point out that not enough has yet been done to ensure that individuals can take advantage of the opportunities they now have as a result of the freedom not to buy annuities with their Defined Contribution pension pot.  The old annuity market did not serve customers well – it worked much more in the interests of the providers, with poorly informed pensioners frequently buying poor value products which were not suitable for their needs.

Pension policy should focus on the ‘people’ rather than the ‘pension pot’: The thrust of pension policy has been revolving too much around what is happening to pension pots, rather than the individuals who are relying on this money for their later life security. The Committee points out that Government needs much better data on how pension freedoms are operating, and recommends urgent research be conducted to see how the freedoms are working.  The DWP and Treasury should join together to monitor progress, but currently the data being published only shows how much money has been taken out, or how many pots have been accessed (either fully or partly), but this tells us little about whether the right decisions have been made.  IF people have many pension pots and are just taking money from part of their savings, that is not of concern and is what the freedoms were meant to facilitate.  But if people are cashing in their entire retirement savings, paying large amounts of tax and either spending the money straight away or just putting it in the bank or other investment accounts, then they are clearly not making the most of the freedoms.  This type of information is vital.

Pensions should work better for customers, with more use of PensionWise guidance and advice to help them, rather than relying on their provider’s helpline: When introduced, the pension freedoms were always meant to be accompanied by the ‘guidance guarantee’ which would provide free, impartial help to those reaching pension age and ensure they understood the risks and opportunities available to them in the new pensions landscape.  To provide this, the Government set up PensionWise, which is now run under the Money and Pensions Service, but take-up has been woefully low. This leaves pension savers at the mercy of their pension provider’s helpline when trying to decide what to do with their pension pot, which cannot possibly ensure they make the most of the opportunities available to them. Those who use PensionWise make better decisions, those who receive paid-for independent financial advice should also be able to understand all their options, but the Government and Regulators have not ensured take-up to protect consumers.

New nudges are not enough, customers should be automatically enrolled into PensionWise appointments: So far, official actions is focussing just on a stronger nudge to try to increase take-up of PensionWise.  The current take-up rate is under 10% and, even after stronger nudges, the expectation is that take-up is unlikely to exceed 20%.  The Work and Pensions Committee rightly says this is not enough and wants the Government to ensure research is conducted quickly to provide much more radical action. It suggests pension savers should have appointments automatically arranged for them, with a trial of people having an appointments at age 50 and at the point they want to first withdraw money and ambitious targets should be set for improved take-up rates – perhaps around 60% - of Guidance and advice. This is something that I have called for in recent years and I believe we must do all we can to support pension savers in making good decisions. The industry has often complained about the cost of extending the reach of PensionWise, but I believe the Government needs to insist that PensionWise is an essential service for pension customers and one that the industry itself should support, because only then will pension customers be able to make better use of their lifelong funds.  Helping more people understand pensions and making them work better through retirement can also help improve the reputation of pensions, encourage more people to leave their money invested for longer and ultimately have more money in later life, rather than rushing to take out money as soon as they can and possibly paying unnecessary tax.

Committee also highlights importance of paid for independent financial advice and need to improve take-up of Pension Advice Allowance: The MPs Report comments on the need to encourage greater take-up of financial advice, as well as the free guidance, as only the advice process can recommend the best products with someone taking responsibility for the outcome on behalf of the customer. It points out that the current rules do allow people to withdraw three lots of £500 in separate years, tax-free, from their pension fund to pay for independent advice. Unfortunately, many providers have hampered customers from accessing this money and the money for advice to be taken more easily.

Pension Providers should be encouraged to offer better new products for pension decumulation, with capped charges: The pension freedoms have not led to a raft of interesting new user-friendly products for people to use when withdrawing their pension income from their pension pot.  The old options of those who do not take an annuity either taking cash or drawdown, are relatively unchanged.  Indeed, consumers who want to just take out their tax-free cash and do not annuitise are then moved into drawdown products, which have much higher charges than their original pension fund, even if they are intending to just leave the money invested and accumulating more investment growth. The Committee would like to see new offerings that would include a combination of different approaches, such as taking some in cash, having a guided drawdown for the early years of retirement and then perhaps locking into an annuity later on.  One of the many problems with annuities is that customers tend to buy them when still relatively young, which prevents them from maximising the benefits of the mortality cross-subsidy, especially if they experience poor health. The costs of drawdown products – whether standard, Flexi-Access or Uncrystallised Pension Fund Lump Sum products – are usually far higher than a standard investment fund, but people often have no intention of taking money out straight away. The Committee is, therefore, right to call for a cap on charges for all standard decumulation products, just as there is for standard auto-enrolment pensions.

Regulators and DWP should work together to ensure consistent rules, based on proper data and research: The Committee calls on the Government to bring an end to the current situation where there are two Regulators responsible for pension rules who operate differently, causing confusion and adding to the already overly complex pension landscape. For example, the FCA (regulator for contract-based DC pensions such as personal pensions and those run by insurance companies) is requiring investment pathways should be offered to all pension customers for retirement, but the Pensions Regulator (responsible for trust-based DC schemes) has no rules guiding savers’ pathway for drawdown funds.