Written evidence from Just Group (PSL0024)

Protecting pension savers – five years on from the Pension Freedoms: Saving for later life

Executive summary:

• Managing pension savings towards the goal of adequate retirement income in later life is difficult. Few savers are likely to be able to achieve the best value from their pension savings without the support of a regulated financial adviser or impartial pensions guidance.
• Most pension savers don’t use free, impartial guidance for support with pension decisions let alone paid-for regulated advice. Usage of impartial Pension Wise guidance and regulated pensions advice has actually fallen in recent years. Despite calls for measures to reverse this situation, no substantive plan has yet been offered by the Government, regulators or the Money and Pensions Service.
• Despite the problem being identified by the present Work and Pension Committees and its predecessors, there remains no ongoing, comprehensive monitoring of trends and outcomes for pension savers. This must change so that potential problems can be identified early, and to enable proper scrutiny of the UK pensions system.

1. Do households in the UK have adequate pension savings for retirement?

Research institutes including the Institute of Fiscal Studies and Pensions Policy Institute suggest many households do not, and that a range of policy interventions will be necessary to achieve meaningful change. These include increasing pension contributions; accepting longer working lives/later retirement ages; increasing the State Pension as a major underpin for retirement income; and/or accepting lower levels of pension income.

Beyond these policy options and the inevitable focus on contributions during the accumulation stage of pension saving, we urge the Committee to reflect on the fact that the approaches taken in the ‘decumulation’ phase also has a major bearing on outcomes for savers. In particular, the difference between optimal and badly informed decision making can have a material and enduring impact on savers’ financial wellbeing in later life.

For those seeking guaranteed income for life through the purchase of an annuity, for example, a person with specific health conditions or lifestyle conditions could see their achievable guaranteed income improve significantly by using a product provider who takes into account their medical conditions and lifestyle factors. For example, a 65 year old male former smoker taking medication for Type 2 diabetes could receive a guaranteed pension income that is 18 per cent higher than a saver who receives their pension income from a product provider that does not provide medical underwriting. Increases can be even higher for those with acute conditions. But achieving this benefit is contingent on those people who are eligible for such benefits being aware of this option, and engaged enough to know how to shop around for the best available rates for their individual circumstances. There has been some positive movement in the pensions market recently, with the majority of providers now offering broking solutions to help savers shop around. But some providers still have yet to offer such services to savers.

Despite the positive impact that can be achieved by shopping around there remains a strong tendency for savers to stay with their incumbent pension provider rather than checking the best available rates, or using a financial adviser to do this for them. Data from the Financial Conduct Authority show the pension freedoms have not led to a surge in pro-consumer, open market competition as was hoped when the reforms were introduced. We believe this was always unlikely without effective policy to challenge low levels of understanding and awareness regarding pensions, and this remains an opportunity missed by the Government.

Drawdown has become the de facto default product for pension savers since the pension freedoms were introduced in 2015. Of those savers who accessed their savings via a retirement product, i.e. rather than withdrawing the entire sum, FCA data show that 65 per cent are accessing their benefits via drawdown. Of these, almost two in three savers (63 per cent) took a drawdown policy from their pension provider.[1] As with the annuity example above, shopping around is complicated and not at all intuitive for savers. These products will be new to the vast majority of savers and difficult to navigate without professional help – a 2018 FCA report described them as “complex, opaque and hard to compare… Products can have as many as 44 charges linked to them”.[2]

Beyond these examples there are many other ways in which savers can lose retirement income as a result of making badly informed decisions. A saver may face reduced income as a result of other inappropriate product purchases, unexpected tax charges, scams or loss of state benefits as a result of pension withdrawals.

Guidance and advice usage is therefore vital to ensuring savers achieve good outcomes and avoid known bad ones. With freely available, impartial pensions guidance already available from Pension Wise but badly underused, the Committee should continue to press the Government on the absence of effective measures to drive up guidance and advice usage at stages earlier in the customer journey, including the recommended evaluation trial for auto-booking appointments with Pension Wise from age 50.

2. Are changes needed to auto-enrolment to provide an adequate level of pension savings for retirement?

Auto-enrolment is proving very successful as a mechanism to bring people into savings. But two further elements will be needed to deliver the over-arching goal of helping people achieve financial wellbeing in retirement.

First, policy interventions that increase contribution levels in a sustainable, practical fashion and at the right time for individuals and employers.

Second, progress in addressing low levels of engagement and understanding, which together reduce people’s ability to make informed decisions about their pensions in both the accumulation and decumulation phases. The available evidence suggests policy measures as impactful as auto-enrolment will be necessary to address these challenges well before the point when savers access their pension benefits.

3. What advice and guidance do people need when saving for retirement?

The value and impact of advice and guidance is likely to be greatest in the latter stages of a person’s working life, when they transition to life after work and towards their eventual retirement. This may be 5, 10, 15 or more years before the point at which a person stops working and starts to draw on their benefits, with the process generally focusing on whether an individual’s accumulated pension savings (or their combined retirement savings as a household) are on track to meet their targeted retirement income needs. If this is not the case and the person has a gap in their retirement plan, advice and guidance can help people identify their options for saving more and maximising their savings, changing their investment approach and/or reassessing when they can retire.

Advice and guidance is likely to be most valuable well in advance of the point when individuals choose to access their pension benefits, in order to provide time for people to familiarise themselves with their pension access options. The ‘pension freedoms’ policy provides savers with unfettered access to Defined Contribution (DC) pension benefits from age 55. The significant challenge facing individuals is how to do so in a way that meets their objectives and achieves the best possible value from their accumulated pension savings.

This is a difficult exercise for most people. Pensions and long-term financial planning is complex and – for the vast majority – the options are unfamiliar. Unlike financial services such as bank accounts, mortgages, cash ISAs, or insurance, people face a range of product options and investment choices at retirement that they are unlikely to have encountered before. Annuities (a guaranteed income for life), drawdown, pension withdrawal, uncrystallised funds pension lump sums (UFPLS) are among the options, and are terms that are known to be unfamiliar, opaque and, to some, intimidating. Utilising the right blend of products at the right time is made still more difficult by risks including record levels of scam activity focused at pension savers, unexpected tax charges and rising inflation.

As the Financial Conduct Authority’s outgoing Chairman Charles Randell told the Treasury Committee during an evidence session in November 2020:

“This issue about people making poor choices when exercising the freedoms and responsibilities that have been put on them in the last 10 years, through a variety of changes in Government policy, is probably the one that I worry about most of all. The pensions dashboard, I think, is some way off, but it will be really important that the safeguards that help to slow down decision-making in these areas and to signpost people to the best sources of guidance they can get are as strong as they humanly can be, because it is heartbreaking. I am sure your postbag is the same as mine, with people who write with absolutely heartrending stories of decisions they have made that have resulted in the loss of their life savings. One cannot ignore that. It has to be the centre of one’s worry list.”

For many, retirement income choices start with a decision to access tax-free cash. At that point, savers also face a range of complex decisions such as which provider to use, where to invest their remaining pot and how quickly to drawdown. They also need to think about how long they expect to live. As the FCA noted in its 2018 Retirement Outcomes Review report: “We found many consumers who do not take advice struggle with these decisions, and many end up in investments that may not be right for them, including in cash.”[3]

Are savers well placed to make decisions without guidance or advice?

The available evidence on financial capability suggests many – and possibly most – are not. Analysis by the Office of National Statistics found that 42 per cent of adults aged under 40 or those aged 40 plus and not retired feel they know enough about pensions to make decisions about saving for retirement, suggesting a majority feel uncertain about their decision-making capacity in this respect.[4] This finding is echoed in research from the International Longevity Centre on DC pension savers’ understanding of key retirement income factors. This study, based on a survey of 5,000 DC pension customers aged 55-70, found:

• Only half said they understood what an annuity is ‘quite or very well’;
• Just 3 per cent said they understood what income drawdown is ‘quite or very well’;
• By contrast, over 90 per cent said they understood what a mortgage is.[5]

The FCA’s 2017 Financial Lives survey found that some savers’ awareness was so poor that they were unsure whether their pension is DC or Defined Benefit (DB), nor did some people know that different options exist for accessing a DC pension. A quarter (25 per cent) of those who accessed a DC pension in the last two years were unable to say how they did so, i.e. whether they purchased an annuity or accessed their pension pot another way.

Downward trends in guidance and advice usage

The FCA published new data on pensions access in December. While the data are pot-specific and therefore do not show pension access trends at individual or household level, they show that the number of DC pension pots accessed after Pension Wise was used has fallen in each of the last three years, from 94,744 in 2018/19 to 94,274 in 2019/20 and 81,805 in 2020/21. A 14 per cent reduction over this three-year period.

Take up of advice has also fallen – from 242,918 pensions accessed via an adviser in 2018/19 to 239,424 in 2019/20 and 194,848 in 2020/21. Drawing the guidance and advice numbers together, the data show that the proportion of DC pensions accessed without Pension Wise or regulated advice being used increased from 48 per cent in 2018/19 to 51 per cent in 2019/20 and 54 per cent 2020/21.[6]

While people clearly need advice and guidance when saving for retirement and making retirement decisions, the FCA data confirm that hundreds of thousands of people each year are not receiving this support. Our concern regarding the potential for negative outcomes for non-advised savers also reflects complacency in policymakers’ and regulators’ proposals, to date, for driving up pension guidance and advice usage. The table below sets out the significant shortcomings of the initiatives intended to help improve savers’ engagement with pension and retirement planning.

5. Apart from increasing contributions, how can the Government improve outcomes for savers?

Auto-enrolment has successfully helped nudge the majority of employees into pension savings but no equivalent interventions have been established to ensure the majority of savers receive help via impartial guidance or regulated advice before making important pension decisions. This is important because of the inherent complexity of pensions.

If current levels of disengagement and understanding are not addressed – through policies that equip people with the understanding and information to make informed decisions – bad outcomes can be expected. These risks are recognised by regulators, consumer advocates, industry experts and all stakeholder groups other than Ministers and officials, but have yet to lead to any substantive action. As a case in point, the Pensions Minister has so far rejected the recommendation to take forward an auto-appointment booking trial to evaluate the impact of this approach on Pension Wise appointment take up.

The Government could do two further things to improve outcomes for savers:

First, the Government should explicitly recognise the range of risks facing pension savers and publish annually a Departmental plan, with input from HM Treasury if necessary, setting out a framework for helping savers manage known risks to their financial wellbeing in retirement. This plan should include measures to stimulate pro-consumer competition in the pensions and retirement market and promote good outcomes from the pension freedoms. The plan should explain what the DWP (and other relevant delivery organisations including the Money and Pensions Service) is doing to improve engagement with and understanding of pensions among DC pension savers, and include an annual baseline survey to track progress towards the stated objectives.

Second, the DWP’s Departmental objectives (as here) for pensions policy are limited to the State Pension and continued roll out of auto-enrolment. The DWP should have a further objective to recognise the impact of the pension freedoms policy, including a commitment to monitor trends in pensions access, encourage competition in the pensions and retirement markets, and ensure adequate protection for savers against known causes of financial harm. This would benefit from efforts to disaggregate current DC pension data from pot level to person and household level, and include analysis of DB and state pension benefits so that policymakers have the necessary data to assess adequacy and resilience of individuals and households in retirement.

6. Can pension providers change the design of pension products to improve outcomes for savers?

We believe there are already adequate product solutions available that allow savers to meet their retirement income needs. Technically savers can blend guaranteed income from an annuity with the flexibility offered by drawdown. Savers need prompts and help to consider this type of approach because strategies such as blending are not always intuitive

The main gap in the pensions and retirement market relates to guidance and advice, which is needed to ensure savers understand their options and can meet their retirement income needs from the existing range of products available, at a time that is right for them. 

February 2022

About Just Group

Just Group plc (“Just”) is a leading provider of retirement income solutions, care plans, Defined Benefit pension de-risking solutions and lifetime mortgages. The Group is the UK’s largest broker of guaranteed income for life solutions and provides regulated retirement focussed financial advice via an highly innovative automated solution. At the core of our business is a social purpose to help people achieve a better later life, which we achieve through our approach to our market, our communities, and active contribution to key pensions, retirement and regulatory policy debates.

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