A single pensions regulator and an independent commission will need to be set up to help protect pension savers when the new pension flexibilities come into effect from April 2015, according to a report by the Work and Pensions Committee.
Its Progress with automatic-enrolment and pension reforms report highlighted that an individual regulator would need to be set up to protect employees from frauds or scams, or from suffering financial loss by making the wrong decision about how to use their pension pots.
Currently, pension regulation is shared between the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR).
The report stated that it is not convinced that the FCA is sufficiently focused on pensions and that the Pension Wise service is unlikely to be sufficient in itself to protect all savers from financial risk.
Dame Anne Begg (pictured), chair of the Work and Pensions Committee, said: “The pensions industry has not always done enough in the past to help savers make the right decisions.
“What savers really need is a strong, single regulator to act in their interests.”
Independent pension commission
The committee’s report also wants a new independent pension commission to be established by July 2015 along the lines of the 2005/06 Pensions (Turner) Commission to assess the impacts of the pension reforms and recommend improvements where necessary.
It wants an independent pensions commission to:
- Review auto-enrolment implementation to date.
- Advise on necessary changes and adjustments to auto-enrolment.
- Consider the implications of the pension freedoms changes.
- Advise government on consequent amendments to existing pensions legislation, and on the development of future pension policy.
One issue the Work and Pensions Committee wants the new commission to explore is the minimum age at which individuals can take advantage of the new pension flexibilities.
This is currently set at age 55, in line with current tax rules, and will rise to 57 in 2028, when the State Pension age increases to 67.
Begg said: “A new independent pension commission would be able to identify any emerging risks, and explore with stakeholders how these can best be addressed. The Turner Commission brought political consensus, full involvement of stakeholders, and detailed consideration of the wider impacts of major pensions policy changes.
“Allowing people to take advantage of the new pension flexibilities 10 years before they get their State Pension could create unrealistic expectations about the age at which they can afford to stop working.
“Our view is that, given the significant tax relief provided for pensions, increased longevity, and the importance of ensuring that people do not underestimate the income they need in retirement, the age at which people should be able to access their pension pots should be changed to five years before the State Pension age, except where there are ill health grounds. This is one of the key issues the proposed new commission should look at.”
Auto-enrolment progress
The report also found that the auto-enrolment process has gone well to date but identifies a number of areas where careful assessment is required.
These include:
- The challenges of extending auto-enrolment to smaller employers.
- The level of minimum contributions for employers and employees.
- How excluded groups, such as self-employed people and those in multiple low-paid jobs, can be brought into pension saving more effectively.
In addition, the committee found that the government has been slow to finanlise details of the pot follows member legislation.
Begg added: “Good progress has been made through auto-enrolment in increasing the number of people who are saving for their retirement, and the amounts being saved.
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“But there is much more to be done. Four million employees will be brought into auto-enrolment over the next few years and the small businesses that employ them will need proper support to meet their obligations.
”It is also important that everyone who can benefit from pension saving understands the advantages of auto-enrolment and is encouraged to remain enrolled.”
I would be very supportive of the suggestion of moving to a single regulator sooner rather than later.
With both auto-enrolment and the pension freedoms at critical stages of development it makes no sense to proceed as we are. A single regulator will provide a clear focus for direct action and early intervention where necessary. We are constantly hearing from either TPR or the FCA about the need to consult one another on a range of activities. This is not only inefficient it is positively dangerous.
A single regulator would be less confusing for consumers, would help to plug gaps in the current arrangements and provide greater consistency of treatment between trust based and contract based schemes.
With greater foresight this should have happened before now, probably a year or more ago at the time the FCA was formed and the functions of banking and financial services regulation were separated. The fact it didn’t probably owed more to a struggle for power and influence between the two owning government departments (DWP and Treasury) than for any good operational reasons and even now the FCA will not be keen on giving up part of its patch. The time for prevaricating, however, is over and a decision needs to be made. There is too much at stake to let this drag on much longer.
I am also generally in favour of the idea of an independent commission along the lines of the 2005/06 Turner Commission. Apart from anything else this would provide a breathing space after the recent upheavals and allow considered expert analysis of the workings of the massive changes brought in and the future direction of travel required. It is perhaps a vain hope that such a commission would be fully independent and totally unconstrained by political influences but it should be given a free rein to express views and make recommendations which hopefully a new government of whatever political persuasion would feel able to accept.
Overall a very good report from the W&P Committee which realistically I doubt will be acted upon this side of the general election. However hopefully it will not be left to gather dust on the shelf for an indeterminate period and will be resurrected and acted upon by the new government as soon as possible thereafter.
There has been growing consensus around the NAPF’s recommendation of an independent commission and today’s report is important because it shows there is also cross-party support for this idea. Our recommendation is based on the belief that a standing independent commission, working alongside Government, will help make sure pensions policy is made in savers’ interests and for the long-term.
Automatic enrolment has been a great success, but this has been hard-won over more than a decade and under the guidance of the Turner Commission. We must make sure its success is built on, not undone by knee-jerk pension policy made for short term political gain, rather than to secure savers a decent retirement.
We fully endorse the Committee’s recommendation for in independent commission and echo its call that this be set up as soon as possible after the General Election.
This document makes very interesting reading. Almost a year ago, the Chancellor announced that ‘no one would have to take out an annuity’ which caused significant disruption in the market and while today’s report reaffirms this, it does point out that ‘annuities are likely to be the best option for many individuals but they will need to become more flexible’. This is something that the industry has taken on board and is working hard to provide.
However, the committee also acknowledges that the full range of decumulation options is unlikely to be in place in April 2015 and highlights that some may even be impractical in the longer term – particularly ‘cashpoint drawdown’.
It also suggests that there is some uncertainty whether Pension Wise will be fully operational when the new pension freedoms become available. These factors add fuel to the argument that people need to carefully consider their options at the start of next month and take their time making their choices – sensible advice when you consider that these could be life changing decisions.
We welcome the proposal to “assess whether the protections for savers that have been put in place so far are adequate” as in order for the new Pension Freedoms to have the positive impact that the Government and Industry want, strong safeguards need to be in place. Independent financial advisers are at the heart of many people’s retirement planning process and can help them to avoid ‘making poor decisions or being exposed to potential fraud and scams’ – a key concern of the committee.
Looking to the longer term future, the committee makes some excellent suggestions around the pension’s dashboard and financial literacy which we believe will help to significantly improve the UKs retirement savings culture and allow people to enjoy the full benefit of these reforms.