Written evidence from Association of British Insurers (PFC0062)

Introduction

1. The Association of British Insurers is the voice of the UK’s world leading insurance and long-term savings industry. A productive, inclusive and thriving sector, we are an industry that provides peace of mind to households and businesses across the UK and powers the growth of local and regional economies by enabling trade, risk taking, investment and innovation.
2. The ABI welcomes the opportunity to submit evidence to the Work and Pensions Select Committee.

Executive Summary

3. The pension reforms announced in the 2014 Budget and introduced from April 2015 were a profound change to the architecture of retirement savings in the UK. The implementation of these changes took place over the course of just one year and were not subject to the powerful and prolonged cross-party scrutiny that benefitted the development and implementation of automatic enrolment.
4. The majority of eligible Defined Contribution (DC) pension pots remain untouched and many savers, particularly those with larger pots, are opting to take a regular income in retirement. However, it is also clear that there is a bias to take a cash lump sum when it is available. Given the disparity between expected and actual exchequer revenue received, overall pension savings are being withdrawn at a much faster rate than the Government anticipated.
5. The central change of the 2015 reforms is the availability of more flexible options to many more consumers. Product innovation has been driven by customer preference for both security and flexibility – and the industry is working to help consumers more easily compare flexible products. The initial impact of the changes led to an 80% drop in guaranteed income sales, but this market is stable with a positive outlook. The FCA has found that people value a guaranteed income but that the product name "annuity" can itself be perceived negatively by consumers.
6. Whilst the early success of automatic enrolment rests to some extent on the power of inertia, it is clear that the pensions freedoms must now be matched by the development of an effective guidance framework. This is necessary to ensure consumers can make active and informed decisions for the long term, and in order to minimise the impact of pension scams.
7. The impact of the reforms will need to be monitored for years to come – more qualitative research needs to be undertaken to enable an understanding of people’s individual decisions in relation to their retirement savings, including whether the options they pursue actually meet their original  objectives. This needs to be accompanied by a clearer indication of the desired outcome of the policy, so that its success can be measured.
8. The Government’s Financial Advice Market Review aspires to improve a crucial element – access to financial advice and guidance – and the development of the new Single Financial Guidance Body (SFGB) will have a significant role to play in in supporting consumers at different life stages in making complex savings decisions. However, much more needs to be done to ensure that the consumers taking serious and long term decisions about retirement are provided with sufficient guidance and – where appropriate – advice. This should not only mean improved usage of Pension Wise but engaging savers at earlier stages as well as further simplification of retirement communications. We are working on this with our members but it requires a joined up approach with Government and regulators as well.
9. The ABI has managed and delivered both the pensions dashboard prototype project and the follow-up assessing the market impact of dashboards. The idea of pensions dashboards has been recommended not only by the Work and Pensions Select Committee but in a range of Government and regulatory documents. The dashboard project report recommends the right for consumers to access information about all of their pensions in a place of their choice in a standardised digital format, via regulated services. This would require legislation to compel providers and schemes to make data available via regulated third parties. 
10. While we support pension flexibility, the implementation of the policy and the development of FAMR, the SFGB and the evolution of pensions dashboards after the implementation of the pension flexibilities does not speak to a coherent strategy. Now is the time for the development of a genuine cross party savings and retirement strategy, informed with extensive stakeholder engagement, much like that which underpinned the development of automatic enrolment.
11. We have set out below a series of recommendations:

12. A note on language: in response to concerns about increasing jargon in pensions, and to drive clear and consistent descriptions of the new retirement options, the ABI worked with stakeholders to produce Making Retirement Choices Clear, a guide to simplified pension language. In it, we refer to lump sums instead of UFPLS, guaranteed income instead of annuities and flexible income instead of flexi-access drawdown. We recognise that this cannot be too rigid and in this response we refer to the legislative phrases where appropriate.

Inquiry Questions

What are people doing with their pension pots (including defined benefit pension entitlements) and are those decisions consistent with their objectives? Is there adequate monitoring of the decisions being made?[1]

What people are doing with their pension pots?

13. The key trends emerging since April 2015 are as follows.
• Most DC pots remain untouched; while over 100,000 pots are accessed every quarter, over 4.7m DC pots belonging to those aged 55 and over have not been accessed.
• Many people are taking a regular income, especially those with larger pots. Since April 2015 over £25bn has been invested in 371,000 retirement income products. Among those taking a regular flexible income, the most common quarterly withdrawal rate is less than 1%.
• Most smaller pots are being taken as lump sums, but preferences differ markedly by age and pot size. The highest number of full withdrawals comes from the 55-59 age band.[2] Those with the smallest pots tend to take full lump sums, with 87% of the 227,000 full withdrawals in 2016/17 from pot sizes less than £30,000. Smaller pots taken as a flexible income are also being withdrawn at a faster rate than larger pots.
• Most new entrants to drawdown are taking the tax-free lump sum and no income. The FCA is conducting research on the understanding and intentions of customers in this position.

14. While evidence so far suggests that consumers are making measured decisions, some warning signs should not be ignored – most obviously, the behavioural bias to take a lump sum when it is available. The pension flexibility reforms brought the Treasury £1.5bn in tax revenue in 2015-2016, £1.2bn higher than its original forecast: overall, pension savings are clearly being withdrawn at a rate much faster than the Government anticipated.

Are those decisions consistent with their objectives?

15. Consumer objectives are highly personal to the individual and their circumstances, so not enough is known about whether consumers' decisions are consistent with their objectives. There are, however, some qualitative findings emerging on how consumers are using their money, on the drivers behind those decisions, and on the level of harm that may result.

16. Citizens Advice found that people appreciate pension flexibility and are spending their savings on “practical considerations”, such as savings, daily living costs, investments, or paying off debts. However, some had unexpected income effects on tax and welfare payments, which may have negative impacts on retirement outcomes. A small minority of consumers had a reduction in welfare payments or lost eligibility completely, especially those with the smallest pots .[3]

17. Research by Ignition House found that most people who took the tax-free lump sum were motivated to do so simply because they could, rather than by need. It found that many also felt that they would rather withdraw some or all of their pension funds to put into ISAs, which they deemed to be safer and better understood than pensions, giving consumers a sense of control.[4] Later research by Ignition House identified an undercurrent of mistrust in pensions, especially among the least engaged consumers.[5] This is  a concern that must be dealt with by the Government, regulators and industry together.

Is there adequate monitoring of the decisions being made?

18. While there is extensive data on the decisions being made, there is not yet adequate monitoring of the drivers behind pension flexibility decisions, the wider circumstances of consumers making them, and the impact of those decisions on retirement outcomes.  The ABI would like to see more regular and consistent monitoring, to better judge whether retirement decisions are of concern. Monitoring alone is not sufficient, and should be accompanied by a stated purpose of the policy, and a clear long-term strategy for long-term savings, so that the success of the policy can be measured.

19. The ABI is part of the DWP Data Sharing and Monitoring Group, with Government departments, regulators, consumer groups, and industry stakeholders. At the time of this submission, the group is collectively considering where it can collaborate on more long-term data collection.    

20. Government-sponsored longitudinal surveys, the Wealth and Assets Survey (WAS) and the Family Resources Study (FRS), will contribute to our understanding of the impacts of pension flexibility, but there are shortfalls. These surveys should be able to:

• show the tax and welfare benefits implications of pension withdrawals
• track customer behaviour over time, including use of advice or guidance and actions of those in drawdown without taking an income
• establish the split of retirement income sources, including from work and property
• show what people did with their money and whether their actions delivered the outcomes they desired. 

21. A more in-depth understanding of the drivers behind pension decisions in retirement may be better achieved through attitudes-focused qualitative and/or quantitative research. Outstanding questions, which may be addressed by WAS and FRS, include:

• awareness of impacts on welfare benefits or tax implications from accessing their pension, and whether this affected behaviour
• relative reliance on DC pensions, and whether this affected behaviour
• consumers' intentions and actual behaviour, and reasons for any difference
• consumers' confidence in managing their pensions in retirement, and whether they are able to do so in practice.

Are people taking proportionate advice and guidance and if not, why not? Are people adjusting behaviour in response to advice and guidance?

22. There is a well-known tension between the inertia that drives automatic enrolment and the need to make decisions about retirement. Enabling more consumers to access advice and getting more consumers into guidance is therefore critical. This is especially the case for consumers looking to access their pensions and take retirement decisions. As noted later in our response, use of advice and guidance is low. We do not yet know if people are adjusting behaviour in response to using Pension Wise; while satisfaction levels are very high, and users feel better informed, we do not know what decisions they subsequently take. DWP should publish further evaluation of the impact of Pension Wise on users' decisions.

23. We support the Financial Advice Market Review’s (FAMR) objectives, in particular its focus on making advice more affordable and accessible, but we do not believe that FAMR will deliver against them.  As such, the FCA and Treasury need to work urgently with industry and stakeholders to chart a new way forward to close the advice gap, and boost access to guidance. This should include exploring with industry and DWP how we can make the use of guidance and/or advice a recognised, positive norm when people choose to access their pension savings. It should also include ongoing dialogue on improving comprehension of the advice boundary and further work on more helpful rules of thumb.  This will help industry and others be much more confident about the support they can give to customers without unintentionally giving advice.

To what extent will pensions dashboards enable consumers to make more informed decisions about their retirement savings? What are the remaining obstacles to their creation and success and how should those obstacles be overcome?

24. The ABI has managed both the pensions dashboard prototype project, which reported to HM Treasury, and the follow-up assessing the market impact of dashboards[6]. The policy aim behind the follow-up project is that pension savers can easily and securely find all of their pensions together, to enable them to understand and make informed decisions about their savings.

25. The dashboard idea has been recommended previously by the Work and Pensions Select Committee and in various Government documents to solve a range of policy problems, including:

• the Financial Advice Market Review – to make advice and guidance more effective and efficient 
• the FCA's Retirement Income Market Study – to help people make informed retirement decisions, as a driver of competition
• the Dormant Assets Commission – to help reunite people with their savings. 

26. In the project, independent consumer research commissioned jointly with the Money Advice Service suggests that “it has a major role to play in helping people feel more in control and make informed decisions". Separately, a survey of 1200 Mumsnet users found that nine out of ten parents think a service showing them all of their pension savings together online would be important in helping them save more for their retirement.[7]

27. Interviews with seven representative examples of international dashboards found that “Different dashboards have had different impacts, however a common theme across all dashboards has been the increased level of engagement with pensions.  Individual countries have seen increases in contributions being paid or increased aggregation activity and reductions in the number of lost pension pots.”

28. Developing an open pensions data infrastructure is complex, but the industry is willing and able to help deliver it. We welcome the commitment from the DWP to take this project forward, as it requires clear support from the Government and regulators. The widespread industry view, and the international experience in nations with simpler pensions systems, is that a voluntary approach would take many years to deliver full coverage. 

29. Therefore, the project recommended that citizens should have a right to access information about all of their pensions in a place of their choice in a standardised digital format, via regulated services. This would mean legislation to compel providers and schemes to make data available via regulated third parties.

30. Our research found strong support for a non-commercial dashboard that is unequivocally impartial, and recognition that innovative third-party services could be provided to meet a range of customer needs, with their consent. It is important that such services are regulated and have controlled access to an “open pensions” infrastructure to increase the opportunities for customers to engage with their pension.

Is Pension Wise working? If not, how should it be reformed? Are there any implications for the proposed creation of a new single public financial guidance body?

31. Guidance is a critical ingredient to supporting consumers, especially those who cannot afford or do not wish to take financial advice. We worked with the FCA, Treasury, TPAS and Citizens Advice to help develop Pension Wise, and have continued to play a key role in ensuring that it remains visible.  Most consumers who use Pension Wise report hearing about it from their provider (57% of responses in August 2017 - the highest source of awareness).[8]

32. The information published to date indicates that Pension Wise is working very well, with satisfaction rates consistently around 90%, and in its service evaluation 85% said it improved their understanding and 89% took some concrete action.[9] However, as noted above, consumer decisions following use of Pension Wise are currently unknown. 

33. FCA consumer research undertaken as part of the Retirement Outcomes Review suggests that awareness of Pension Wise was good, but few customers within their research made contact in relation to an early encashment decision, viewing it as unnecessary.  This is despite feeling that Pension Wise is well publicised on TV and in providers literature.  Those consumers did however highlight that when they do come to actually stopping work and taking a retirement income they may well seek help from Pension Wise or seek advice.  Those taking an income decision were more likely to refer to Pension Wise information or seek an appointment.  This suggests that consumers have segmented early encashment decisions as something that does not require use of Pension Wise, whilst a more complicated retirement or income decision later on may require it.[10] 

34. In response to the Retirement Outcomes Review we have called for consideration of how the choice architecture can drive greater uptake of guidance, by integrating it into the customer journey so that it becomes a positive norm. The establishment of a SFGB is an important step towards citizens accessing guidance at all relevant points in life. It is also welcome that it will continue the role of co-ordinating a financial capability strategy across the UK.

35. This role could be supported by a number of interventions to improve the retirement process which we would like to be explored, including:

• These Retirement communications that are shorter, simpler and come much earlier – for example, at age 50 - to help people understand their options, partly informed by the recent research by the Behavioural Insights Team with insurers[11]
• Prompts at various and earlier “teachable moments”, such as the Mid-life MOT proposed by John Cridland in the Independent Review of State Pension Age[12]
• Defaulting customers into guidance when they seek to access their pots, for example by automatic scheduling of a date for a guidance appointment
• Reviewing the retirement risk warnings, and communications once people have already accessed their pension, as consumers may make pension decisions over many years.

36. These interventions require input from the industry, Government and regulators as well as guidance bodies.  This is linked to the need for an overall strategy, and for a desired outcome of the policy so that there is a clear destination for guidance to guide people towards. The ABI will be considering with members what a customer journey with some of these elements inserted into it might look like, and whether and how it could work in practice.

Are there persistent gaps in the advice and guidance market and what might fill them? Is automated advice and guidance filling gaps as expected?

37. We have ongoing concerns about access to advice and guidance in the markets our members serve, in particular around retirement and savings. 

38. The FCA’s FAMR Baseline Report and accompanying research paints a concerning picture of consumer use of financial advice, guidance and information.[13]  The quantitative research shows that in the last 12 months, less than one in ten UK adults (6%), or 3.2 million people, had regulated financial advice related to investments, saving into a pension or retirement planning.  It further shows that 25%, or 12.5 million people, who might need advice did not access it. 

39. The reasons given by the 25% for not taking advice over the last 12 months are varied, including not recognising the need to take advice, feeling able to take their own decisions, having not got round to taking advice, or a lack of trust and faith in the quality of the advice.  Consumers in this group felt that there were few issues in terms of accessing advice, but cost continues to present a clear barrier.  Just over half (51%) would not pay for regulated financial advice at any price, and those that would pay, 20% would find it too expensive at over £100, although 19% would be willing to pay more than £500. 

40. Despite the lack of cost, only 26% of all UK adults used at least one form of guidance or information in relation to investments, saving into a pension and/or retirement planning in the last 12 months.  Of those aged over 55 and planning to retire in the next two years, under half (44%) had used at least one form of guidance or information, although only 10% used the Pension Advisory Service and only 7% used Pension Wise. 

41. We believe that it is unrealistic, at this stage, to have expected automated solutions to have already emerged to the extent that they would have filled the advice gap.  We have seen deployment of automated advice predominantly in the investments markets, but we have also seen propositions used successfully in the retirement income market, and interest in developing automated solutions in the future.  There is significant potential and scope for automated advice and guidance services to offer lower cost alternatives in the future, including in the workplace. 

42. Is there evidence of product market competition resulting in cheaper, clearer or a wider products for consumers? Are people switching from their pension provider in accessing their pots? Is an adequate annuity market being sustained?

Evidence of product market competition resulting in cheaper, clearer or wider products for consumers

43. There is a wide range of retirement products to ensure that consumer needs are being met. The market remains competitive, and in many cases charges have reduced since April 2015. While not all trust-based occupational schemes offer flexible options to their members, there are accessible and affordable retirement products available, for providers' new and existing customers, including those with small pots.

44. Flexible income products are available on the open market without advice, with no minimum pot size, and at prices below the auto-enrolment charge cap. The ABI will however continue to monitor whether those with the smallest pots have access to appropriate retirement solutions.

45. Product innovation since 2015 has been driven by consumer preferences for both security and flexibility, with additional hybrid products combining guaranteed and flexible income being added to the market, as well as new features to help people pass their pension on to beneficiaries.[14] There has also been innovation in how providers and advisers interact with consumers, and ways to simplify the choices faced by consumers.

46. However, product innovation had already happened before 2015, including guaranteed income based on health and lifestyle, hybrid products bringing together flexible and guaranteed income, blended solutions which combine products from different providers, development of simpler flexible income products, as well as a risk warning system to flag sustainability concerns to financial advisers.

Are people switching from their pension provider in accessing their pots?

47. There is evidence demonstrating that people are switching from their pension provider in accessing their pension pots. According to ABI statistics, around half of guaranteed income sales, and over half of flexible income sales, are to new, rather than to existing customers.

48. However, switching providers at the point of accessing a pension should not be used as a definitive benchmark to measure competition or outcomes. For example, around half of customers that buy an guaranteed income from their current provider had a guaranteed rate incorporated into their pension, which typically beat rates available on the open market. Additionally, customers do not only transfer at the point of taking their pension:
• 89,000 customers aged 55 or over transferred to another provider in Q2 and Q3 2016 combined
• Data from the Origo Options transfer service shows a growth in drawdown to drawdown transfers after the pension flexibility reforms, with between 1,000 and 2,000 transfers taking place per month[15]
• Customers who consolidate their pensions ahead of retirement, and then take a flexible income through drawdown, are likely to view their decision to enter drawdown as accessing a feature of a product they had already chosen, rather than choosing a product and shopping around for it.

49. The industry is aware that it can be difficult to compare flexible income products and the ABI is developing proposals to tackle this. This is very different from shopping around for a guaranteed income, which is a one-off decision driven primarily by finding the best income possible for the customer’s needs. Flexible income providers compete on several factors: guarantees, customer service, investment choice and performance, and flexibility in access to funds, and customers use it for different reasons. Value for money is important in all of these. The ABI will set out a proposal for a flexible income comparison tool for consumers to use, which could be delivered by an organisation like the new SFGB.

Is an adequate annuity market being sustained?

50. The number of firms in the guaranteed income market has reduced due to providers merging or stopping offering the product, particularly since the introduction of Solvency II and the pension flexibility changes. But the market has now stabilised, with positive prospects, as a guaranteed income product remains an appropriate solution for many people, and many people who are currently in drawdown will go on to a guaranteed income. Over ten providers offer guaranteed income, of which seven compete in the open market. Competition is supported by effective advice and shopping around services offered by providers, schemes and others.

51. Guaranteed income sales fell dramatically immediately after the pension flexibility reforms, around 80% since the freedom and choice announcement in 2014, and have remained at around that level since then; our most recent data shows an increase in 2017. There has been downward pressure on rates, and commercial pressure on providers, caused by a combination of factors including monetary policy, capital requirements, economic conditions and demographic trends. This led to a perception that guaranteed income products offered poor value for money, although they have been consistently found to be economically good value. The FCA found in an experiment that people valued a guaranteed income, but viewed it more positively when it was seen as an insurance product rather than an investment product; and when it was not called an “annuity”.

Are the Government and Financial Conduct Authority taking adequate steps to prevent scamming and mis-selling?

52. Concerns about pension scams pre-date pension flexibility. We welcome and strongly support the recent Government announcements - making it harder to establish a pension scheme with a dormant company, only allowing transfers to schemes with a genuine employment link, and banning cold calling - and call for them to be implemented at the earliest opportunity. There will be substantial detail to work through, but they are important changes. Ultimately, a "safe list" of schemes to give certainty to providers about who they should and should not transfer to would present a more efficient system.  

53. Since 2015, the risks to consumers have changed. It is now easier for scammers to target customers who have taken, or could take, their entire pension as cash. Pension providers, including insurers, work with public bodies to raise awareness among customers of the risks of scams; but once the money is out of the pension system, there is little or nothing that providers or regulators can do. The ban on cold calling will help, but may be difficult to enforce, especially for overseas calls. It should be accompanied by a step up in awareness raising, in collaboration between government, industry and guidance bodies. 

54. It would also benefit from a consistent industry approach. The ABI supports and fed into the industry Code of Good Practice on Combating Pension Scams, and is developing a guide to identifying and supporting vulnerable customers in retirement.

Are the freedom and choice reforms part of a coherent retirement saving strategy? To what extent is it complimentary to or undermined by other policies?

55. The industry has long called for long-term strategy, to provide consensus, stability and certainty. The ABI supports the reforms in principle, which are intended to give flexibility to match the diversity of consumer circumstances and preferences. However, the changes did not form part of a long-term strategy and did not state a desired outcome for the policy, or indicate what a good outcome for customers looks like.  

56. In addition, the one-year implementation period was not sufficient time for the Government to consult and legislate, and for the FCA to consult and introduce new rules – let alone for the industry to adapt to these rules. By way of comparison, automatic enrolment was introduced over several years following a cross-party process. The result of a one-year period was that policies, some of which we supported or called for, were introduced very late or changed after implementation. For example:
• FCA rules on Retirement Risk Warnings without consultation, two months before implementation, and different approaches by the FCA and the Pensions Regulator
• A new process for customers to reclaim overpaid tax, on the last working day before implementation
• The reduction of the Money Purchase Annual Allowance in April 2017, affecting customers who had already accessed their pension on a different set of rules
• Changes to the process for transferring pensions with a guaranteed annuity rate, which are due later this year.

57. Regular rule changes have a negative impact on consumers as well as firms. Research by Ignition House for the FCA found that a contributing factor to mistrust in pensions "was the perception that pension rules are always changing – and usually changing to the detriment of the consumer", and that this has driven some people's decisions to access pensions early[16].

58. Looking forward, the ABI has recommended a series of principles to inform interventions in the retirement market. They should be grounded in long-term, stable and joined-up strategy, based on a consensus across Government and if possible, political parties and stakeholders. It should include a common view of what a good retirement should be. This strategy should promote active consumer engagement, to help people to make investment and withdrawal decisions, and to compare retirement options. It should ensure that regulation is consistent between the FCA and TPR, including of solutions for those who do not engage in decisions about retirement.

59. The forthcoming FCA pensions strategy  a good opportunity to settle on a coherent and consensus-driven approach, and should be developed in close co-operation with the Government. It is important for this strategy to recognise that not everyone will reach outcomes that are unquestionably the best for them. However, if Government begins with a long-term strategy, then it will help to establish consumer trust and engagement in pensions, helping to ensure that as many people as possible reach their retirement goals.

October 2017