Written evidence from Department for Work and Pensions (PFC0076)

The government believes it is important that people who have worked hard and saved responsibly all their lives have the freedom and choice to access their pension savings in a safe manner how and when they choose upon retirement.

Since the introduction of Pension Freedoms in April 2015, the government has been working closely with the pensions industry to develop a vibrant and competitive environment for customers to make informed decisions about their pension savings.

The government continues to work with regulators, the industry and consumer groups to monitor the uptake of the Freedoms and the development of the decumulation market. Since April 2015, individuals have accessed more than a million defined contribution (DC) pension pots, and over £10.8 billion has been accessed through over 1.9 million payments.[1]

FCA consumer research shows that of the people taking full cash withdrawals the majority (52%) subsequently re-invest the money – putting it into savings or bank accounts, investing it in property or equities or using it to pay off debts – with only a quarter spending the money on other items.[2] These full cash withdrawals have typically been small pots (59% under £10,000; 88% under £30,000)[3] and those withdrawing have on average four other sources of income for retirement, with these pots largely not the main source intended for retirement.[4] 94% of people making a full cash withdrawal had at least one other source of retirement income beyond the state pension.[5] At present, a £10,000 pot is likely to provide for an annuity of £400 a year or £33 a month if a tax free lump sum of £2,500 has been taken, so is not likely to contribute the main part of a retirement income.[6]

There has also been an increase in individuals choosing drawdown products since the Freedoms started, and this accounts for 29% of pots accessed.[7] Around two thirds of the individuals choosing drawdown are only withdrawing the 25% tax-free element and leaving the rest invested, meaning that their savings can continue to grow.[8]

It is too early to draw definitive conclusions on the basis of this behaviour, given the Freedoms have only been in place for two years. Indeed, as of September 2016 there were still 5.6 million DC pots belonging to people aged 55 and over left untouched. [9]  However, this early evidence suggests that individuals are making decisions to cash in small pots while drawing down a steadier income stream from larger pension pots.

The government routinely monitors and publishes key information regarding the development of the post-Freedoms retirement market, including Pension Wise data on the government performance platform and quarterly flexible payments from pensions statistics from HMRC. The Financial Conduct Authority (FCA) has a Quarterly Retirement Income Data request to help it deliver on its commitment to monitor the market and track developments, consumer behaviour, and outcomes in the post-Freedoms landscape. The FCA is also undertaking a review of the retirement market post-Freedoms, looking at particular issues facing those consumers making non-advised decumulation decisions, and published its interim Retirement Outcomes Review report in July this year. The final report is due to be published in the first half of 2018.

Government aims

The government have a number of incentives that support the principle that individuals should save for their retirement. The government’s retirement saving strategy begins with its ongoing commitment to automatic enrolment. As of the end of September 2017 8.7 million jobholders had been automatically enrolled into a workplace pension and automatic enrolment will help even more people in future.[10]

DWP has been reviewing automatic enrolment this year and will report shortly on how to strengthen the programme further so that it can benefit groups who have previously been harder for the pensions industry to reach. There is still work to be done – many people are still under-saving for retirement, particularly the self-employed and those on lower incomes. However, the State Pension also acts as a means of ensuring that pensioners have an income in retirement in addition to whatever they have been able to save privately.

The Fuller Working Lives partnership approach, led by DWP, focuses on helping older people to stay in work for longer, enabling them to build up the savings needed for a more secure retirement, as well as benefiting employers and the wider economy. The approach reflects the many benefits for people to remain in, or return to, work in later life, where individuals who work longer can enjoy additional income from earnings, a boosted private pension income and State Pension contributions, enabling a higher standard of living in retirement.

The government considers the Pension Freedoms as complementary to and consistent with a more flexible approach to working lives. People can and should be trusted with their own finances when they retire, after working and saving into a pension. It is right to give people the option to choose what is best for them and for their family circumstances – peoples’ spending needs vary during later years and the Freedoms make it possible to tailor the way individuals access their pension savings to suit them. For many, taking an annuity at some point can still be the right choice. However, some peoples’ circumstances mean that they would prefer to draw down amounts from their pension on an ad hoc basis, for example if they wish to continue working but reduce their hours. We have moved away from a system that effectively required a single choice at one point in time to one that better supports the transition from work to retirement. 

Guidance and advice

The government is committed to ensuring that people can access high-quality, free, impartial guidance on pensions. That’s why in 2015 the government established Pension Wise, following the announcement of Pension Freedoms in the 2014 Budget.

Pension Wise delivers a high-quality service to a growing number of customers. Since December 2015 Pension Wise service data has been regularly published on the GOV.UK performance platform.[11] There have been around 5.7 million visits to the Pension Wise website since launch and a new self-serve journey to take people through the options has recently been introduced. There have been more than 167,000 Pension Wise appointments delivered over the phone or face to face. This includes 61,000 appointments in 2015/16, 66,000 in 2016/17 and around 40,000 in the first six months of 2017/18.

Customer satisfaction with Pension Wise remains very high. Independent research conducted by Ipsos Mori shows that customer satisfaction with appointments was 94%, and that 97% of appointment customers said they were likely to recommend the service to others or had already done so. Around 9 in 10 customers believed that their understanding of their pensions options had improved because of their Pension Wise appointment. Furthermore, the research demonstrates that people who had had a Pension Wise appointment, or had used the Pension Wise website, were significantly more likely to answer questions about their pension options correctly.[12]

The Pension Wise service evaluation report showed that people who used Pension Wise were more likely than non-users to have considered how much tax they would pay based on chosen options, considered charges that might be incurred based on chosen options, and to have shopped around for quotes.

The main reasons non-users of the service gave for not making an appointment with Pension Wise were:

●        ‘I already knew enough’ (30%)

●        ‘I got/will get what I need from a financial adviser’ (25%)

●        ‘I haven’t got around to it/will do it later’ (19%)

●        ‘I got/will get what I need from pension provider’ (13%)

●        ‘My pension is not large enough’ (10%)

Pension schemes and providers are required by law to signpost people to Pension Wise through a wake-up pack or when a customer contacts them about withdrawing their money. This appears to be working well – around half of the people who contact Pension Wise say that they first heard about the service from their pension provider. In addition to this, national marketing campaigns have run across a range of media channels and the government has been working with pension providers and employers to raise awareness of the service in other ways.

Government-sponsored guidance is currently made available through three free-to-use services – the Money Advice Service (MAS), The Pensions Advisory Service (TPAS) and Pension Wise. These bodies were designed and established at different times for different purposes and have overlapping remits with different brands. The Financial Guidance and Claims Bill (FGCB) will create a new guidance body which will merge the functions of these three bodies, in order to simplify the existing public financial guidance landscape and provide a more joined-up offering for consumers. The new single financial guidance body will make it easier for people to access information and guidance and help them make effective financial decisions on their pensions.

The government also recognises the importance of people being able to access affordable financial advice from private sector providers. The Economic Secretary to the Treasury and the FCA Board launched the Financial Advice Market Review (FAMR) in August 2015 to explore how the financial advice market could work better for consumers, including the market for pensions advice.[13] Respondents to the FAMR consultation confirmed that gaps existed for consumers, particularly those with lower levels of wealth. In March 2016, FAMR published its final report, setting out a package of 28 recommendations to support the development of a market that provides consumers with affordable and accessible financial advice, at all stages of their lives.[14]

The recommendations in FAMR focus on affordability, including steps to make the provision of advice and guidance to the mass market more cost-effective; accessibility, including measures to help consumers engage more effectively with advice; and liabilities and consumer redress. The Treasury and the FCA accepted all of the FAMR recommendations at Budget 2016.

FAMR’s first recommendation was that a Financial Advice Working Group (FAWG) should be formed to take forward some of FAMR’s recommendations. The FAWG included a selection of consumer and industry experts from the FAMR Expert Advisory Panel, the Financial Services Consumer Panel, the FCA Smaller Business Practitioner Panel, and the FCA Practitioner Panel. FAMR reported on progress in delivering the recommendations in April 2017. All recommendations were either completed or are on track to be completed.[15]

FAMR found that the various terms used to describe financial advice lack clarity and that this undermines consumers’ ability to understand the options available to them, and undermines the confidence of firms to provide more help to their customers without fear of inadvertently crossing the boundary from guidance into regulated advice. A key recommendation from FAMR was that the Treasury should consult on amending the definition of regulated advice in the existing Regulated Activities Order (RAO) so that regulated advice is based upon a personal recommendation, in line with the EU definition set out in the Markets in Financial Instruments Direction (MiFID). FAMR recommended that this would give firms the confidence to provide more help to their customers without fear of inadvertently crossing the boundary into regulated advice, and would improve consumer understanding and engagement. This proposal was widely welcomed and in early 2017, following a period of consultation, the government laid a statutory instrument to change the definition of financial advice for regulated firms, to bring it into line with the MiFID II definition. This change will come into effect from 3 January 2018 and means that regulated firms will be giving regulated advice only where they provide a personal recommendation. This clearer boundary will give providers more confidence to provide consumers with generic guidance on the options available to them, and consumers more clarity on the options available to them.

FAMR also found that many consumers are not engaged with their finances. Respondents to FAMR suggested that nudges at crucial life stages could be used to prompt consumers to think about their financial position and consider taking action. FAMR therefore recommended that a task force should be established to design and test a set of ‘rules of thumb’ and nudges. A dedicated sub-group of the FAWG took forward FAMR’s recommendation to design and test a set of ‘rules of thumb’ and nudges, and published a report in March 2017 which recommended a set of five new financial ‘rules of thumb’, together with principles for designing nudges and illustrative examples.[16] The government has agreed that the new single financial guidance body should take ownership of the ‘rules of thumb’ and nudges work in future.

Other FAMR recommendations to improve the affordability and accessibility of pensions advice include: increasing the income tax exemption for employer-arranged financial advice on pensions from £150 to £500, and introducing the Pensions Advice Allowance, which will allow consumers to access £500 of their defined contribution or hybrid pension pot tax free, up to three times at any age, to redeem against the cost of pensions and retirement advice.

In addition, FAMR recommended that the FCA should establish an Advice Unit to help firms develop their automated advice models to serve the gap in the market in a number of areas including pensions. The FCA set up the Advice Unit in May 2016 and the unit currently provides regulatory feedback to firms. The FCA has been consulting on proposed guidance based on the experiences of the Advice Unit. The consultation closed on 2 October and the FCA will publish its finalised guidance shortly.

Pensions Dashboards

The government announced at Budget 2016 that it will ensure the pensions industry designs, develops and launches pensions dashboards by 2019.

These dashboards have the potential to allow individuals to see their pensions savings and State Pension digitally in one place and provide them with the information they need to make important decisions on their retirement savings.

Further work is needed to address the various outstanding policy and delivery questions before consumer-facing dashboards can be rolled out.

The interim report of the industry project group managed by the Association of British Insurers published on 12 October has helped to build the evidence base for pensions dashboards and the government will consider its findings carefully.

DWP has recently agreed to take forward this work within government, with policy responsibility for Pensions Dashboards transferring to it from HMT from 19 October. DWP will lead a feasibility study to explore how best to approach pensions dashboards and will work closely with colleagues in HMT, industry, consumer-facing organisations and the regulators to do so. DWP will provide an update on this work by spring next year.

Retirement market

The government believes that existing products need to be adapted to be made easier and simpler to use, to suit the needs of individuals. Since the Freedoms were introduced in 2015, providers have taken steps to develop products which offer simpler ‘flexi-access’ drawdown that consumers can purchase without financial advice.

The FCA’s interim Retirement Outcomes Review report, published in July this year, noted that product innovation has been limited to date. However, it is important to recognise that the Freedoms were only brought in two years prior to this and the government expects industry to innovate in future. Respondents to the FCA’s Retirement Outcome Review indicated that there were no significant regulatory barriers preventing innovation, whether in the creation of new products, or in refinements to existing ones, that can lead to better and smoother processes for individuals to understand and manage their savings more effectively.

The government recognises there is more work to be done to encourage shopping around where appropriate, but expects providers to ensure a good deal is provided to those who remain with their provider. The government will continue to assess innovation in the market and stands ready to work with industry and regulators to ensure customer demands are being met and any potential barriers to a thriving, competitive market can be addressed.

The report also noted that providers are withdrawing from the open annuity market, continuing the trend that started before the introduction of the Freedoms in 2015. As of July 2017, there were 7 firms still offering annuities on the open market, whilst many providers are still offering annuities to their existing customers (accounting for 30% of all annuity sales since the Freedoms were introduced). Whilst consolidation increases the risk of weak competition, the current state of the market is in line with the expected impact of lower demand resulting from the Freedoms. The FCA do not propose any interventions at this current time.

Pension Scams

The government takes the threat of pension scams very seriously and has already taken steps to protect savers. In 2015 it established Project Bloom, a cross-Government taskforce currently led by the Pensions Regulator (TPR), to tackle scams and identify emerging threats. Project Bloom members include the FCA, City of London Police, the Serious Fraud Office, the Pensions Advisory Service, Pension Wise and relevant government departments, including HM Treasury and the Department for Work and Pensions.

Working with its partners, Project Bloom identifies risks to the public, takes enforcement action where appropriate and raises awareness of scams through communication campaigns. Intelligence sharing has led to a number of enforcement actions resulting in successful criminal convictions.

TPR’s Scorpion campaign raises awareness of the risks posed by scams among trustees, business advisers and savers. The FCA’s ScamSmart campaign provides information on investment scams, and provides an online tool that helps savers gauge the legitimacy of potential investments. Both Pension Wise and the Pensions Advisory Service also offer savers support and guidance regarding scams.

These measures help ensure that savers accessing the Freedoms can access the information and support they need to avoid falling victim to pension scams. However, savers should always exercise caution when receiving unsolicited calls about their pension and seek independent guidance or advice before making important financial decisions.

In addition, in 2015 the government increased the maximum fines that the Information Commissioner’s Office (ICO) can issue on company directors responsible for nuisance marketing. In the last financial year, they issued fines of nearly £2 million. In April 2017, the government provided half a million pounds to provide call blocking devices to society’s most vulnerable people, so they can feel safer when answering the phone.

The government also recently published its response to a consultation on further measures to tackle pension scams. This confirmed that the government would bring forward legislation to ban cold calling in relation to pensions; tighten HMRC rules to stop scammers opening fraudulent pension schemes; and help prevent the transfer of money from occupational pension schemes into fraudulent ones. The government will legislate to ban cold calling in relation to pensions when Parliamentary time allows. The consultation response is available to read at this address: https://www.gov.uk/government/consultations/pension-scams.

The government also recognises the risk that people may be persuaded to invest in unsuitable products. This may not necessarily involve pension scams but can still lead to consumer detriment. The FCA is already addressing this risk through its ongoing supervisory and enforcement activity. Its Unauthorised Business Division identifies and disrupts firms and individuals carrying out unauthorised investment business. The FCA is also able to restrict a firm’s permission and/or secure undertakings by the firm not to carry on certain types of business. Since the start of 2016, more than 30 firms have agreed to stop or have stopped providing advice or limit their pension transfer activity following the FCA’s intervention.

Robust due diligence by pension providers can be a vital safeguard against pension scams. In particular, the FCA warned providers of Self-Invested Personal Pension schemes (SIPPs) of the potential risk of scams in this sector of the market. The FCA also recently asked SIPP providers to send it information on the non-standard investments that they hold on behalf of customers as these may be linked to scams or mis-selling. The information the FCA receives will help shape any further interventions it determines may be needed.

October 2017