MPs want to improve protection for pension savers by guiding them to better retirement. I hope government will accept their pension schemes bill amendments.
- Government will be under pressure from MPs next week to ensure pension savers are better protected
- Work and Pensions Select Committee and cross party MPs are right to seek to build on success of automatic enrolment to guide people into better pension decisions
- Proposed amendments to Pension Schemes Bill in the Commons on Monday want auto-enrolment to help stream pension savers into their free guidance appointments
- Government should seize this chance to boost Pension Wise usage.
MPs are right to recognise the need to better protect consumers’ pensions: As MPs debate the Pension Schemes Bill in Parliament, it is encouraging to see amendments laid by the Work and Pensions Select Committee Chair and cross-party MPs, which would help address the problems faced by pension savers who are unaware of the complex pension rules and may be inadvertently falling for scams, or withdrawing money too soon from their pensions and facing significant tax bills. A cross party group of MPs is now trying to address this more seriously.
Guiding people through complex pension choices: Rule changes in 2015 dubbed ‘pension freedoms’ gave pension savers more flexibility to use their pension money, rather than just leaving them to buy annuities, which have become increasingly expensive as central bank Quantitative Easing has inflated the cost of assets such as Government bonds on which annuity pricing is based. The new freedoms, however, also increased the burden of responsibility on individuals to make the right choices. Central to the reforms was a ‘guidance guarantee’ to ensure people had the financial knowledge and confidence to deal with the extra risks, with free, impartial help before they took money from their pensions. Pension Wise embodies that promise, as Ministers recognised that pensions are complex and most pension savers do not recognise all the risks they may face when withdrawing their hard-earned savings.
Pension Wise gets rave reviews but take-up is woefully low – MPs propose auto-enrolment not just a bit more ‘nudge’: While it gets great reviews, the Government and regulators have admitted that far too few are using Pension Wise. Less than 10% of those eligible are using Pension Wise and take-up is falling. This leaves people completely unprotected, despite a Government-organised, free, impartial service that is there to help them. That is why it is so welcome that MPs are trying to amend the current legislation to increase the use of Pension Wise guidance by automatically booking appointments. I hope this initiative from cross-party MPs will be accepted, to help ensure nobody needs to miss out on their entitlement to impartial and independent support.
Are people making good decisions? There is evidence of people cashing in pensions early – years before they plan to retire – as well as a rise in the number of scams. Research has found many people taking pension money may be more focused on meeting short-term financial needs rather than considering their later life income requirements. The chairman of the Financial Conduct Authority recently told MPs that poor pension choices “is probably the issue I worry about most of all” and that the safeguards need to be “as strong as they humanly can be”. If he really means this, then supporting the significant rise in Pension Wise use would be an excellent idea.
Shepherding people to their guidance session: The amendment to the Pension Schemes Bill going through Parliament proposes that members of defined contribution pension schemes receive an automatic appointment for their free Pension Wise guidance session five years before they become eligible to take money from their pensions. People can choose to defer the appointment if they wish but will be invited back each year until they have received the valuable impartial guidance.
Most people don’t know about Pension Wise even though it could be so valuable to them: Many people don’t take up pension guidance because they don’t know about it. Most pension savers aren’t particularly financially engaged so don’t realise how it can help them. If they do not have an independent financial adviser to guide them, then streaming people into appointments is an inclusive policy that embraces everyone regardless of their level of capability or knowledge.
Government proposals to introduce a ‘stronger nudge’ are more of a fudge: The government recognises guidance usage needs a boost but recently announced it plans to just rely on better ‘signposting’ and stronger ‘nudges’. However, these nudges have been studied in recent testing and delivered only marginal gains, not the radical and urgent transformation in guidance usage required.
Building on success of auto-enrolment that helps people putting money into pensions, we should now help them before they take money out: ONS data shows that automatic enrolment into workplace pensions has seen participation rise from five in ten workers to closer to nine in ten, with very low opt out rates. That’s 10 million more people saving for retirement but surely It makes no sense to abandon these same people and expose them to risks of losing their pensions, when we could efficiently secure them a guidance appointment to help them make the most of their money.
Boosting guidance is a nettle that needs to be grasped: People have been given pension freedom but not the tools and support to enable them to make better choices and avoid the pitfalls.. Failing to act will compound the problem and require more drastic action later. It isn’t clear why the government wants to implement a trialled solution that has been proven to deliver a very poor outcome. I hope Ministers will accept the MPs amendments on Monday.