Written evidence from Pensions and Lifetime Savings Association (PFC0078)

The Pensions and Lifetime Savings Association, the national association with a ninety-year history of helping pension professionals run better pension schemes. Our members include over 1,300 pension schemes with 20 million members and £1tn in assets, and over 400 supporting businesses. They make us the voice for workplace pensions and lifetime savings in Westminster, Whitehall and Brussels.

INTRODUCTION

1. The Pensions and Lifetime Savings Association welcomes the Committee's inquiry into pensions freedoms. When announced in 2014 the Association (then the National Association of Pension Funds) supported the flexibility and choice that the changes offered consumers. We agree with the comments made by the Committee that the practical effects should be monitored to ensure that it is working as envisaged.
2. To this end, we have undertaken a number of pieces of research and policy work since the 2014 announcement which are relevant to the Committee's interests. We will reference these throughout our evidence, and will of course be pleased to provide further information or oral evidence as the inquiry progresses. 
3. In this submission we focus primarily on the questions asked by the Committee. Our broader thinking on the reform of the pension freedoms is contained within our response to the Financial Conduct Authority's (FCA) Retirement Outcomes Review[1] and our recent report “Hitting the Target”[2].
4. In those documents we lay out a new regulatory approach to the at retirement decision. This is based on four elements:
1. Schemes and providers, where possible, should seek to support members to make active decisions at retirement;
2. They should also help savers in their decumulation choices by sign-posting them towards a suitable product/solution;
3. the products/solutions are to be selected by an independent body, a trustee or IGC, which has responsibility to operate in the interests of members; and
4. the product/solution must conform to government mandated principles, which would also provide a ‘safe harbour’ for the trustee or IGC which has selected it.
5. Our proposed new framework operates on the basis that savers must make a choice, and should be supported in making that choice by Pensions Wise and, as appropriate, other forms of guidance and advice.

Q1 - What are people doing with their pension pots and are those decisions consistent with their objectives? Is there adequate monitoring of the decisions being made?

6. This section of evidence is based on our recent primary research with savers undertaken in December 2016[3]. We should stress that this is a preliminary assessment, as the pensions freedoms have only been in operation for two years and many of the people using them have a greater degree of pension entitlement, including a greater proportion of Defined Benefit (DB) savings, than those who will use the reforms in the future. These pioneers of pension freedoms are not typical of subsequent cohorts but may, through their actions and experiences, create norms for their peers to follow.
7. We are concerned about how the freedoms will impact those retiring in 10-15 years’ time, many of whom will have only Defined Contribution (DC) pots and, despite most (84%) preferring to have an income stream (rather than cash) in retirement, do not have a guided route to achieving this outcome.[4]
8. There are an estimated three million individuals eligible to release money under the pensions freedoms. From our research, between October 2015 and December 2016 we estimate that 700,000 individuals made use of the freedoms and that 2.1 million people have investigated their pension options[5]. As such, a large minority seem to have made use of the freedoms, while a majority have perhaps evaluated their options but not taken action.
9. Of the 700,000 who have taken action and released cash, most are male (70%  male and 30% female) and the population has a median age of 60. They are more likely than average to have a pension already in payment (40%). And they are more likely than average to have access to a DB pension (31%). Most of those who have taken action are retired (56 per cent).
10. Of the 700,000 who had taken action, 28% had taken only a Pension Commencement Lump Sum (PCLS). 36% had put funds into drawdown, with or without taking a PCLS. 17 per cent had bought an annuity, with or without taking PCLS, and 15% had taken cash in addition to a PCLS. Only 5% had taken a combination of these actions since the inception of the freedoms.

Figure 1: how the 700,000 who took action acted

11. We found that most people are not immediately spending cash in its entirety. Of those who have taken cash from their fund, 44% report saving or investing some and spending the remainder. 28% have saved or invested it all while 20% have spent all of it.
12. Of those entering drawdown, just under half (47%) intended to draw a regular income while 53% intended to draw money on an “as needed” basis.
13. With regard to the question of whether there is adequate monitoring of the pensions freedoms, it is our view that there is some good work underway, in particular by the Department of Work and Pensions’ Data Sharing and Monitoring Group, which involves a number of government and pension industry participants including the PLSA.
14. However, despite the work of this group, there is no comprehensive view of the decisions being taken by all those accessing their pensions, nor is there an assessment of whether the decisions taken are likely to result in good outcomes. We recommend that the Government should aim to undertake this work in the near future.

Q2 - Are people taking proportionate advice and guidance and if not, why not? Are people adjusting behaviour in response to advice and guidance?

15. We believe that people are not accessing advice and guidance in sufficient numbers. Our research shows that only 22% of those who have accessed their pensions used Pension Wise. 17 % of the same group used the Pensions Wise website and only 4% used a face-to-face or telephony service.
16. In our research we found that of those taking action to release money under the pensions freedoms, 32% paid for regulated financial advice. Of those, 76% took independent financial advice. All of those taking advice reported that it was “helpful”.
17. In terms of other actions taken to research the retirement choice, reading newspapers (28%), online research (24%), word of mouth talking to family and friends (23%) and talking to their employer (16%) were also quoted.
18. To increase the proportion of savers getting access to guidance, we believe both the Government and industry should do more to promote the use of Pensions Wise.

Q3 - 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?

19. We believe that pensions dashboards, whilst not a panacea, have a key role to play in helping consumers make more informed decisions about their savings. The dashboard infrastructure will provide, we think, two main benefits to consumers:
1. Pensions dashboards should enable consumers to see all of their pension savings in one place. Currently consumers have a patchwork of information available to them in a mixture of paper and digital formats. Independent research commissioned by the Pensions Dashboard Project and the Money Advice Service illustrated how difficult consumers find it to collate all this information[6].
2. The creation of Pensions Dashboards should help consumers have a greater understanding of what their savings will mean for their retirement income. International examples of the pensions dashboard have always included an income projection tool and we gather that this will also be the case in the UK. Moreover, the Pension Dashboard industry group also plans to allow for the use of third party tools to help people understand and engage with their pensions.
20. Furthermore, we believe that dashboards will be at their most valuable when people understand how much they need to save. In our recent consultation paper, “Hitting the Target”[7], we recommend a system of national Retirement Income Targets and outlined how these could work. These targets would be set at three levels of income: ‘minimum’, ‘modest’ and ‘comfortable’; based on a realistic understanding of the resources required to sustain a particular lifestyle. Our research suggests that people do not understand how much they need to save for retirement (77%) and a series of target lifestyles would help people plan their retirement income (80%). This is the approach taken in Australia, where what's known as the Retirement Standard has been considered ‘ground breaking.’[8]
21. The remaining obstacles to the creation of pensions dashboards are practical and regulatory. Pensions dashboards will only be able to help consumers if they provide a comprehensive service. If the consumer does not see all of their pension information when using a dashboard, they are in danger of making inappropriate decisions on the basis of incomplete information. However, due to the complexity of the UK pension system it is questionable as to whether all schemes would join voluntarily. This is due to either statutory, trust law or commercial considerations. In consequence, the best way to ensure that Pension Dashboards will be comprehensive is for them to be made compulsory.
22. The second obstacle is the creation of a suitable regime of governance and regulation to ensure that consumer benefit remains at the heart of any new infrastructure. With regard to governance, an entity will need to own the constituent parts of the pensions dashboard infrastructure and will need to manage change to the system. Given the substantial consumer protection issues at play, we believe that it would be sensible for such a body to be accountable to Parliament. There is also a need for those who intend to use the data provided by the dashboard infrastructure to be regulated. The FCA has extensive experience of regulating such services and would be best placed to do so. In addition, in our view, there is a need to set down requirements for what data is to be displayed and the way it is to be calculated.
23. We also believe that there should be at least one, high profile, pensions dashboard that is independent of any commercial interests. We believe that the new Single Financial Guidance Body would be the appropriate organisation to host such a website.
24. We welcome the Minister for Pensions and Financial Inclusion’s statement on 19 October that the Government has made a decision that the Pensions Dashboard will definitely go ahead. We wholly agree with the Minister that the needs of the consumer must be at the heart of the Dashboard’s design and that consumer interests and information must be properly safeguarded.

q4 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?

25. The evidence on the performance of Pension Wise is positive. For the minority who use it, 91 per cent report satisfaction with the service, 94 per cent say they would recommend the service to others and 85 per cent say that they felt their understanding of their options had improved following their Pension Wise appointment.[9]
26. These statistics are a credit to those who built the Pension Wise service from scratch in a short timeframe. It is not clear, though, what impact Pension Wise is having on individual decision making. While people may feel better about the decisions they have taken, this is of little value if they are feeling better in the short-term about decisions they subsequently regret. Therefore, we recommend that the DWP undertakes further evaluation and looks in more depth at the impact Pension Wise has on the quality of decisions taken.
27. We found, though, that people are not likely to use Pension Wise when making a decumulation decision. Only around one in five (22%) people who took action had used Pension Wise before making a decision (17% had used the website, 2% had emailed a query, 2% had a face-to-face appointment and 1% had a telephone appointment). In light of this, the main implication for the Single Financial Guidance Body (SFGB) is that it should work with the Government and regulators to try to encourage a high level of use of its services.
28. More generally, the PLSA remains impressed by The Pensions Advisory Service (TPAS), the quality of the service provided, the quality of its leadership and the value it offers to the public purse. We hope that TPAS’s approach is preserved and built on when the new body is formed.
29. We anticipate that there will be many different areas competing for the attention of those running the new SFGB.  We hope and expect that pensions will remain a priority for the new organisation. We believe that 'at retirement' decision making, alongside pension scams and more niche elements of TPAS’ caseload, should initially be the primary focus. But, in time, we would hope that the new body considers pensions guidance across the life cycle.

q5 Are there persistent gaps in the advice and guidance market and what might fill them? Is automated advice and guidance filling gaps as expected?

30. We are concerned that following the FCA's Retail Distribution Review, many do not have access to suitable advice and, where they do, customers are unwilling to pay for it. As can be seen from earlier sections of our evidence only a minority have sought advice or guidance when decumulating.
31. Reports from Deloitte[10] and Accenture[11] suggest that there is considerable latent demand for low-cost automated advice in the UK. We believe that automated or semi-automated engagement tools might considerably strengthen the buy side of the 'at retirement' market.
32. Automated advice is not yet filling the advice gap but a market is beginning to develop. We can see providers like Nutmeg, Moneyfarm and others operating robo advice in the form of automated or partially automated portfolio construction tools. LV also offers its “retirement wizard” service on personal pension pots between £13,500 and £150,000. This service has a robo element but is not fully automated.
33. As we have stated in our recent report, “Hitting the Target”, we believe that automated guidance and advice should be rolled out across the pensions industry in order to improve member awareness of their decumulation options and to help them make good decisions in retirement.

q6 Is there evidence of product market competition resulting in cheaper, clearer or a wider range of products for consumers? ARE PEOPLE SWITCHING FROM THEIR PENSION PROVIDER IN ACCESSING THEIR POTS? IS AN ADEQUATE ANNUITY MARKET BEING SUSTAINED?

34. There is little evidence yet of innovation and good reasons to be concerned about whether or not positive innovation will happen:
1. First, we think the buy side is weak and this is probably a chronic problem. While the principal/agent issues present in the accumulation phase are absent at decumulation, there are few other reasons to think that the decumulation phase is different. The Office of Fair Trading's 2013 report into the workplace pension market argued that the buy side in that market was one of the weakest they had examined[12]. This was largely seen as being due to the high information asymmetries between purchaser and provider. We see similar evidence of buy side weakness in the decumulation market - in published market research, in assessments of financial capability and in the interim report of the FCA’s Retirement Outcomes Market Review.[13] In the absence of meaningful consumer pressure, the impetus to innovate in the consumer interest is diminished.
2. Second, decumulation decisions are, to varying degrees, irreversible or hard to reverse. Some products are purchased for life, and, even where switching is possible, money drawn down cannot be unspent. The difficulty or impossibility of switching reduces pressure on the provider and increases the importance of the initial purchasing decision. Difficulties in switching are one potential explanation for weak associations between consumer choice and service quality.
3. Third, innovation in the accumulation market has been driven as much by regulatory and legislative action as it has been by competitive pressure. Policy action, including the charge cap and the introduction of NEST have, alongside competition, had a positive impact on charges. Policy action has also been critical in dealing with legacy charge issues. 
35. On the basis of this assessment, we think that without significant policy change, the market is unlikely to evolve in the interests of consumers. We discuss this further in our report, 'Hitting the Target'.
36. In respect of switching, based on our own market research and on the FCA’s research on non-advised customers, we think that there is a significant difference in behaviour between advised and non-advised customers.
37. 53% of those accessing their pension via drawdown say that they bought their drawdown product through a provider other than their accumulation phase provider. 46% reported using an adviser to manage their portfolio. These figures suggest switching is taking place where advice is being sought.
38. This is very different to the FCA’s research into those entering drawdown on a non-advised basis. The FCA found that over 90 per cent of those who did not take advice remained with their accumulation phase provider[14]. We believe this is strong evidence of a default effect in product choice at retirement.
39. Of those purchasing an annuity, 46% purchased it from their existing provider or scheme. 24% had bought it by shopping around on the internet and 24% had used an intermediary (18% using an adviser and 6% using an annuity broker). 6% purchased their annuity through a service provided by their existing employer or provider.
40. In respect of the persistence of the annuity market, we believe, following the FCA’s Retirement Outcomes Review, that a market is being sustained. We would be concerned by any further contraction.

q7 Are the Government and Financial Conduct Authority taking adequate steps to prevent scamming and mis-selling?

41. The measures announced by the Government, such as a ban on cold calling and requiring an 'active' sponsoring employer for new schemes, are steps in the right direction. But we are concerned that there is no timetable for most of the measures proposed and some them will still be subject to exploitation by scammers. We would like the Government to adopt a more ambitious approach, outlined below.
42. In our view, the best way to resolve the scams issue would be to introduce an authorisation regime for pension schemes and limitations on the right to transfer. Given that different types of scheme present varying degrees of risk and that the resources available to schemes also vary, we believe a new authorisation regime would need to be adjusted according to the type and size of scheme.
43. As such, authorisation would operate in different ways for different types and sizes of scheme, but the objective in each case would be the same – to ensure savers and trustees can be confident that a robust system of regulation is ensuring that the pension schemes in which they save – or to which they might transfer – can be trusted.
44. For Master Trusts, an authorisation regime is already being introduced through the Pension Schemes Act 2017.
45. For large schemes (whether multi-employer DB or single-employer DB or DC), while an authorisation regime would be desirable in the medium-to-long term, the scam risks are relatively low, so the introduction of a new regime for such schemes is not an immediate priority.
46. For small schemes with fewer than 1001 members, including Small Self-Administered Schemes (SSASs), given the high risks involved, we propose that immediate action be taken. The exact nature of the authorisation regime need not be as onerous as for Master Trusts, but it would need to ensure that such schemes are operating for bona fide reasons and are non-fraudulent. We propose that the regime should be based on one of the following options:
1. no small scheme would be allowed to accept transfers in unless it has appointed an independent professional trustee who is compliant with a new and comprehensive framework to ensure these individuals meet demanding standards; or
2. no small scheme would be allowed to accept transfers in unless it has appointed a trustee who is a registered professional, such as a lawyer, an accountant or an actuary. (This would build on, but strengthen and modernise, the pre-2006 requirement for SSASs to have a ‘Pensioneer Trustee’).
47. Regarding single-member schemes, of which there are 760,000, we do not see any good reason for a member to wish to transfer to such a scheme. In cases where a single-member scheme has been set up specifically to receive a transfer, this should ring a loud warning bell for the transferring scheme’s trustees.
48. The key innovation in the PLSA’s proposals would be the introduction of an independent professional trustee or a registered professional:
1. The independent professional trustee or registered professional would be given a ‘whistle-blowing’ duty in cases where there is a risk of scamming. By ‘risk of scamming’, we mean any activity that falls within the definition of a scam set out in section 2.1 of the Government’s recent scams consultation paper. This includes ‘inappropriate investments’ which might well be legal, but unwise. ‘Whistle-blowing’ would mean reporting the scam-related activity to the Pensions Regulator and HM Revenue & Customs.
2. The independent professional trustee or registered professional would also be expected to tell the other trustees to stop making the inappropriate investments and, if they persist, to tell them to cease accepting transfers into the scheme.
49. The proposed authorisation regime would significantly reduce the due diligence required from schemes. Under these proposals, the scheme would simply check whether the receiving scheme had been authorised and, if so, would pay the transfer. Transfers would be made more quickly. This approach would also remove the discretion that trustees currently have to pay transfers even where the member does not have a statutory right to a transfer.

q8 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?

50. As noted above, in our consultation, “Hitting the Target”, we propose that a series of retirement income targets should be developed to help guide individuals and policy-makers. We believe that these targets could be used by government to help design a coherent retirement savings strategy. For example, certain policies, such as the state pension, could be designed to ensure that everyone achieves the minimum level of income. Other policies, e.g. auto-enrolment, could be designed to encourage saving up to the modest level, while others, e.g. guidance and tax relief, might be designed to enable people achieve the comfortable level.
51. “Hitting the Target” also outlined our view on the best way to combine defaults/ choice architecture and individual engagement in retirement savings policy. The conclusion we reached was that at each major juncture, there should be a path of least resistance for the saver based on the understanding of that saver’s best interests.
52. In the accumulation phase this involves automatically enrolling individuals and providing a suitable default fund. It also means a higher statutory minimum contribution rate. In the case of decumulation, we believe that the path of least resistance should be to an approved retirement income product, through the 'signposting' system we set out in the introduction to this evidence paper.
53. Increasingly, we believe that the purpose of engagement and communications should be twofold. In some cases, the purpose of communications should be to encourage people to be comfortable with a default. The Department for Work and Pensions' approach to communicating automatic enrolment is based, correctly, on the insight that being open about the possibility of opting out makes people more comfortable with automatic enrolment itself. In other cases, the purpose of engagement should be to identify people for whom the path of least resistance is not suitable and encourage them to make more complex active choices.
54. Critically, we believe it is possible to devise a framework for DC pensions that preserves individual freedom and choice, and hence is in keeping with the previous Government’s reforms while at the same time safeguarding consumers.

Pensions and Lifetime Savings Association

23 October 2017

Annex: A new regulatory framework for Decumulation

A new regulatory framework

In “Hitting the Target” we outline a new regulatory framework for decumulation that would enable trustees and IGCs to support savers in making effective decisions.  We believe that a new framework should work as follows:

• Schemes and providers, where possible, should support members to make active decisions; and
• Support savers to make effective choices by sign-posting them towards suitable decumulation pathways;
• An independent body (a trustee or IGC) would select a suitable decumulation product / solution for members.  The product or solution selected should be appropriate to the membership of the scheme as a whole; and
• The product / solution selected must conform to Government-mandated principles, which would also provide a ‘safe harbour’ for trustees and IGCs who have selected the suggested pathway

Our proposed new framework operates on the basis that savers must make a choice, and should be supported in making that choice by Pensions Wise and, as appropriate, other forms of guidance and advice.

The approach to decumulation that we are proposing rests on the design of a new process for exiting the accumulation phase and entering the decumulation pathway, as well as the formation of a series of mandatory product/ solution principles.

The Decumulation Process 

The process for entering the decumulation pathway would involve a limited number of stages: 

In this process, trustees/IGCs would select a decumulation product / solution appropriate to the membership of the scheme and sign-post members.  The selected product / solution would need to conform to principles required by the Government, which would be designed to ensure good outcomes for members and to guard against trustees/IGCs being held liable for sub-optimal outcomes. 

Members would be encouraged to make an active decision.  No member would be moved into the sign-posted decumulation product / solution without their explicit consent and all communications with the member would present the full range of options open to them (e.g. cash, annuity, drawdown, transfers). Information about typical scheme member decumulation choices would also be provided as standard, alongside information on where further guidance and advice can be obtained.

New Product / Solution Principles 

The adoption of suitable product / solution principles is essential if members are to secure good outcomes.  These should stipulate that the products / solutions should:

• Operate in the member’s interest: Products / solutions should be overseen by an independent body that operates in the interests of members.  That is to say that it should be a trust-based vehicle or governed by a suitably empowered IGC.  This is intended to: provide a default investment strategy that operates in the interest of members; set recommended minimum and maximum income levels of drawdown to protect against someone outliving their capital; protect against cognitive decline; limit the need for people to take complex unadvised decisions in later life; and comply with regulatory requirements, such as ensuring value for money. 
• Provides a sustainable income: Products / solutions should provide an income that the scheme member can use throughout later life.  PLSA research demonstrates that 84% of savers want to achieve some sort of income stream in retirement from their accumulated savings.  
• Provides flexibility for capital withdrawals: Savers appreciate the ability to access capital sums and prefer products / solutions that allow them to do so.  As a consequence, products should offer a sufficient degree of flexibility to enable savers to vary their income and capital withdrawals. 

October 2017