Government publishes report into pension freedoms


The Work and Pensions Committee has recommended that default pensions decumulation routes should be introduced in order to mirror the accumulation successes achieved by auto-enrolment.

The recommendation has been published as part of the Pension freedoms: ninth report of session 2017-19 report, which proposes measures that aim to facilitate a pension freedoms market that works better for pension scheme members. It incorporates considerations around how best to protect savers who are disengaged with pension choices and explores how to empower pension members to make active decisions around their retirement savings.

In the report it suggests that the Financial Conduct Authority’s (FCA) proposal of introducing default decumulation pathways is implemented, with any providers that offer drawdown products required to also offer a default option that is targeted at the provider’s core customer group by April 2019. Default drawdown products would be subjected to the same 0.75% charge cap as auto-enrolment schemes. In addition, the remit of the Independent Governance Committees to assess value for money in the accumulation phase should be broadened to also include default decumulation products.

Linked to this, the report proposes that the National Employment Savings Trust (NEST) should be allowed to provide decumulation products from April 2019, on the condition that NEST can repay its start-up loan. This should include establishing a default drawdown pathway.

In the report it suggests that in order to improve employee engagement with pension savings, the FCA and The Pensions Regulator (TPR) should require all pension providers to issue a one-page pension passport as part of their pre-retirement communications with pension scheme members. The FCA and TPR should liaise to produce a template best practice passport by June 2018.

The report further recommends that the government clearly sets out the long-term objectives of pension freedoms and how it will monitor and report on performance outcomes against these objectives, and that the FCA conduct and publish a review that compares pension member outcomes if they receive face-to-face advice versus automated advice.

The report lastly acknowledges the government’s plans for a single pensions dashboard that will be hosted by the forthcoming single financial guidance body and funded by the industry levy. Due to be implemented by April 2019, the report suggests that the dashboard should encompass details of state pensions, defined contribution (DC) pensions and defined benefit (DB) pensions. The report therefore proposes that the government mandate all pension providers to provide the necessary information to the dashboard, consulting with TPR on an implementation timetable. The timetable should ensure that at least 80% of all DB pension schemes are visible on the dashboard by April 2019, with the remainder to follow.

In the report it states: “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.”

John Wilson, head of technical at JLT Employee Benefits, said: “Savers needed to be protected from the unscrupulous elements of our industry. The nudge techniques of automatic enrolment can be applied during accumulation and decumulation, and a pensions pathway is a better option than savers being left to navigate retail markets without advice or guidance.

“The reforms introduced in 2015 have increased engagement in pensions. While we need to help savers make better informed decisions the unwinding of freedom and choice would be a retrograde step, and so any additional measures need to stay within the spirit of those reforms.”

Nathan Long, senior pensions analyst at Hargreaves Lansdown, added: “The report really is a tale of two halves, striving for more confident pension savers at the same time as tailoring a retirement straight jacket. The committee found that pension freedom works well where savers and investors are equipped to make confident financial decisions, with simplicity of information a key ingredient to boosting understanding.

“Taking advice and guidance at the point of finishing work can be hugely beneficial, but does not include a complementary time machine voyage to pay more into [members’] pension earlier on. The answer remains to encourage personal ownership of retirement planning at much younger ages.

“How people can confidently navigate their retirement options and not risk running out of money is not answered by charge capping drawdown solutions. Life after work can last over 40 years, so income and investment strategies have to be built for the long-term. This also means any solution has to involve active investment management to adapt to changing market conditions.

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“Guided drawdown solutions which couple the right investment strategy and the right income withdrawal approach are what the retire-as-you-go generation are crying out for. The word default should be banished from the decisions made at retirement, as hugely personal choices don’t lend themselves to a one-size-fits all approach. It is important to inject a healthy dose of realism into these decisions, as drawing more than the income naturally produced by your investments puts you at the greatest risk of running out of money in retirement.

Technology is rightly flagged as having a role to play when improving retirements, but the report pushes its use in providing financial advice, yet is less keen when it comes to opening up our pension data across multiple pension dashboards. Open banking has put people firmly in control of elements of their own finances, yet pensions are not seemingly being treated with the same urgency. People will struggle to make confident retirement planning decisions without innovation.”