The Work and Pensions Select Committee’s “Pensions Freedom” report published this morning adds further impetus to the demand for savers to be offered default options when they take their money.
This has been a longstanding demand of the TUC. We warned even before the so-called pension freedom reforms were launched in 2015 that savers could lose out without a simple route to making sensible choices about how to access their pension.
Those changes allow people to cash in their savings from age 55. They were undertaken partly due to concerns many savers were buying poor value annuities, a product that exchanges their savings for a lifetime income.
But there was little discussion ahead of the changes about how to help savers navigate the array of options open to them without being ripped off or making poor decisions.
As acknowledged by the committee today, the pensions freedom reforms are also at odds with successful changes in the saving stage where most workers are automatically enrolled into a pension scheme with compulsory employer contributions.
In a remarkable demand for a policy that has been in place for three years, the committee said: “We recommend that the Government sets out in response to this report (a) what the long-term objectives of pension freedoms are and (b) how it will monitor and report on performance outcomes against those objectives.”
The TUC has long been worried both that some savers might run out of money and that others spend too little and stick their money in a low interest bank account in the hope it wouldn’t run out.
This has chimed with the committee.
“There is little evidence that people are being reckless with their savings; if anything they are being overly conservative,” MPs found.
And as the evidence has mounted that the government’s assumption that the market would provide is flawed, so has the pressure on ministers to act.
“The success of automatic enrolment in overcoming market failure in the accumulation phase offers a template for strengthening pension freedoms in the decumulation phase,” the committee said.
“People would still be free to choose to invest and spend their own money as they wished.
“But if they did not make an active choice, they would move into a suitable and regulated default product.”
MPs called on the government to require all providers of income drawdown, a means of taking money from a pension, to offer a default solution targeted at their core consumers. This would have same 0.75 per cent cap on charges charge cap that applies to automatic enrolment schemes.
Similarly, the remit of Independent Governance Committees to scrutinise value for money in the accumulation phase should be extended to default drawdown products, the committee said. These protections should be in place by April 2019.
The committee also called for the government to rethink its decision not to allow state -backed provider NEST to offer retirement products, a decision heavily criticised by the TUC when it was announced last year.
“Concerns that allowing NEST to offer such products would hinder competition in the market would carry greater weight were there evidence of a functioning market currently. Indeed, the evidence from automatic enrolment suggests NEST may drive better retirement outcomes by forcing other providers to offer greater value or risk savers switching over to NEST to get a better retirement deal,” the committee said.
It said NEST should provide retirement products from April 2019.
The committee’s conclusions are important and well-argued. However, they aren’t in themselves sufficient to secure savers’ interests.
It is not clear that a charge cap and the oversight of what have provided to be rather toothless independent governance committees would be sufficient
In particular, bog-standard drawdown alone, where savers take money straight from their savings pot, still leaves them at risk of running out of money, especially if they are unlucky with the direction of financial markets, as TUC analysis has previously shown.
But today’s report is a significant step towards developing a rational and evidence-based version of pensions freedom.