Pension warning bells are ringing but ministers plough on regardless

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Published date
22 Jun 2018
The government has rejected proposals to help pension savers at retirement, despite mounting evidence that the current system is not fit for the future

MPs on the Work and Pensions Committee had called for savers in defined contribution pensions, the most common form of workplace pension, to be offered default options when they access their money. Defined contribution pensions are the sort that give savers a lump sum at retirement.

The committee had taken note of the mounting evidence that many savers are cashing in their savings or drifting into poor value drawdown products (a means of taking money out of your pension).

But the government insisted that “measures to require individuals to be placed into particular products would be inconsistent with the freedom and choice reforms”.

In 2014, then-Chancellor George Osborne announced the end of rules that required most savers to buy an annuity giving them a lifelong income. He called it “pension freedom”.

In its response to the Pensions committee the government also failed to lift the ban on state-backed NEST offering its members retirement products. Though it left the way open for future change.

“If the market does not provide suitable low-cost solutions aimed at small savers that NEST members are able to access easily and meets their needs, then there could be a case for NEST to provide such solutions directly.”

It said it would examine a report on retirement outcomes due to be published by the Financial Conduct Authority (FCA) shortly.

The government’s attitude is irresponsible short-termism.

One of the challenges of sensible policy-making in pensions is that the results take decades to become apparent.

So when warnings signs become apparent, as it is with retirement income, it is important to pay attention.

Previous evidence from the FCA pointed to a growing culture of cashing in pension pots early and a failure of savers to shop around for the best deal.

This isn’t a huge issue currently because many of those coming to retirement have other savings such as defined benefit pensions that pay out a lifelong income based on your service and earnings. But in a decade’s time things will look very different.
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This isn’t a huge issue currently because many of those coming to retirement have other savings such as defined benefit pensions that pay out a lifelong income based on your service and earnings.

But in a decade’s time things will look very different as people rely on their defined contribution savings as a major part of their retirement income.

At this point scams, excessive charges, a bad turn for financial markets, outliving their savings or underspending due to fear of future costs could impact on the standard of living standards experienced by millions of retirees.

For them a default option providing access to a lifetime income, as well perhaps as a pot of cash, delivered at a fair price, would be immensely valuable.

It is particularly important that NEST, which is on course to provide pensions to around one in three UK workers, can offer such a service to its vast body of low- and middle-income members.

Meanwhile, those who want more complicated options, or can afford advisers who will oversee their savings, could continue to exercise the full pension freedoms.

Automatic enrolment has been a huge success in bringing millions of people into the pensions system. The establishment of NEST has ensured that even low-income workers, who have long been poorly served by the financial sector, have a high quality good value home for their savings.

It would be remarkably short-sighted to undermine these gains by letting these very savers down at retirement.