10th March 2015
Cross-party MPs have argued that the age at which savers will be able to cash in their pension funds from April is too low.
The Work and Pensions Committee would like a new independent commission to look at issues such as whether savers should be able to access their money at age 55 when they cannot generally receive their state pension for another 10 years. It says that giving people access to their savings at this age may give people an unrealistic idea about when they will be able to afford to stop work and argues the age should be raised by five years.
In a report published today, the Committee also called for a single watchdog to take responsibility for pensions regulation and warned that they are not confident in the Financial Conduct Authority’s ability to protect savers.
Currently pensions oversight is shared between the Financial Conduct Authority and The Pensions Regulator, but the Committee said that it would be better for consumers if a single body was responsible for the whole sector.
The Committee warned that the Governments plan for the free guidance service, Pensions Wise, may not be enough to protect savers from making bad decisions about their retirement when new freedoms come into force in April.
Dame Anne Begg MP, chair of the Work and Pensions Committee, said: “The new pension flexibilities give savers the freedom to use their money in the way they choose and have the potential to make retirement saving really attractive.
“But savers need to be properly protected from being ripped off in frauds or scams, or suffering financial loss from making the wrong decision about how to use their pension pots. The pensions industry has not always done enough in the past to help savers make the right decisions.
“What savers really need is a strong, single regulator to act in their interests. We are not convinced that the FCA is sufficiently focused on pensions.
“The comment made in evidence to us that it can’t ‘stop fools acting like fools’ does not inspire confidence in the FCA’s willingness to be proactive in protecting savers. The Government is coming round to our way of thinking about the need for a single regulator. We believe that the big shift to the new pension flexibilities in April means that it is now time to make this change, which we originally recommended back in 2013.”
The Committee called for a new independent pension commission, along the lines of the 2005-06 Pensions (Turner) Commission. It said the scale and pace of recent changes in pensions policy have completely changed the retirement saving landscape and it is necessary to review the extent of the changes and their implications.
The Committee pointed to the new flexibilities coming into force in April, which will give savers much more freedom in how they use their pension savings, in particular by removing the obligation to convert pension pots into annuities.
Dame Anne Begg said: “The Government has set up the Pension Wise service which will provide free guidance at the point when savers can first access their pension savings. This is a welcome and necessary step. But it is unlikely to be sufficient in itself to protect all savers from financial risk, particularly given how complicated pensions are for people to understand and the pension industry’s poor past record in always acting in savers’ best interests.”
Many witnesses to the Committee argued that savers needed further protection, in addition to the Pension Wise service, through what has become known as the “second line of defence”. This would require pension providers to ask savers a number of key questions about their personal circumstances before releasing money from pension pots, to ensure that they have thought through the consequences of their decisions, including the implications of any health conditions and the needs of dependants.
When the FCA gave evidence to the Committee in December 2014, it was not convinced of the need for additional protection of this kind. However, in January it announced that this duty would be placed on providers from April 2015.
Dame Anne Begg said: “More still needs to be done to protect savers. One of the early tasks for the new commission should be to assess whether there are weaknesses and loopholes in the existing protections and recommend urgent action where necessary.”
One issue which the Committee wants the new commission to explore is the minimum age at which individuals can take advantage of the new pension flexibilities. This is currently set at age 55, in line with current tax rules, and will rise to 57 in 2028, when State Pension age increases to 67.
Dame Anne Begg said: “Allowing people to take advantage of the new pension flexibilities 10 years before they get their State Pension could create unrealistic expectations about the age at which they can afford to stop working.
“Our view is that, given the significant tax relief provided for pensions, increased longevity, and the importance of ensuring that people do not underestimate the income they need in retirement, the age at which people should be able to access their pension pots should be changed to five years before the State Pension age, except where there are ill health grounds. This is one of the key issues the proposed new commission should look at.”
Automatic enrolment places a requirement on employers to enrol employees in workplace pension schemes. Implementation began in 2012 and the process will continue with existing smaller employers until 2017. The Committee acknowledged that the process has gone well to date but it also identifies a number of areas where careful assessment is required.
It therefore recommends that the proposed independent commission should look at a range of auto-enrolment issues. These include: the challenges of extending AE to smaller employers; the level of minimum contributions for employers and employees; and how currently excluded groups, such as self-employed people and those in multiple low-paid jobs, can be brought into pension saving more effectively. It would like to see close monitoring of opt-out levels after savers have been automatically enrolled.
The MPs said that regulators should prioritise the introduction of a “pensions dashboard” to enable individuals to access consolidated information about all their pension saving in one place, ideally including both private and state pension entitlement, and its use by providers should be made mandatory.
Frances O’Grady, general secretary of the TUC, said: “The Committee is right to warn that savers are at risk of being “ripped off” in a new pensions scandal after George Osborne rushed through radical reforms with little thought of the consequences.
“With new pension freedoms starting in less than a month we cannot afford to let savers get stung by excessive charges. The government must seriously consider the proposal from Which? for the urgent introduction of a drawdown charge cap.
“It is welcome that the Committee adds its voice to calls for a new pensions commission to bring back long-term thinking and consensus-building to pensions policy-making. The Committee sets out a useful to-do list for the next pensions minister, including the vital tasks of bringing more low earners into pensions auto-enrolment and increasing pension contributions.”
Mark Stopard, head of product development at Partnership, said: “Almost a year ago, the Chancellor announced that ‘no one would have to take out an annuity’ which caused significant disruption in the market and while today’s report reaffirms this, it does point out that ‘annuities are likely to be the best option for many individuals but they will need to become more flexible’. This is something that the industry has taken on board and is working hard to provide.
“However, the committee also acknowledges that the full range of decumulation options is unlikely to be in place in April 2015 and highlights that some may even be impractical in the longer term – particularly ‘cashpoint drawdown’.
“It also suggests that there is some uncertainty whether Pension Wise will be fully operational when the new pension freedoms become available. People need to carefully consider their options at the start of next month and take their time making their choices – sensible advice when you consider that these could be life changing decisions.”