Regulators are unclear about how the take-up levels of pensions guidance should look like as a result of the “stronger nudge”, since parts of the proposal have yet to be tested, the Work and Pensions Committee has heard.
Regulators and the government have long been keen to increase the uptake of Pension Wise guidance by savers. However, asked what level of uptake should be aimed for, David Fairs, executive director of regulatory policy, analysis and advice at the Pensions Regulator, was unable to put a figure on it.
“I think that’s quite a difficult question to answer. The degree of complexity that individual pension arrangements have is very much an individual perspective,” he said in a Work and Pensions Committee hearing on Wednesday.
“Individuals who have their entire life in a defined benefit pension scheme actually need very little support unless they decide to transfer to a defined contribution arrangement, where if their pension is over £30,000 they’re required to get financial advice in any case.
It remains to be seen whether Pension Wise has the capacity to scale up their service to the levels required to offer guidance services on an opt-out basis, without sacrificing the quality service levels that make the sessions effective in the first place
Jon Greer, Quilter
“We’re in the very early days of stronger nudge, and I think we perhaps have to see whether the stronger nudge […] provides the right response,” he said.
The Department for Work and Pensions launched in July a consultation with proposals towards increasing the uptake of pensions guidance, where it proposed to require trustees and managers to ensure that individuals have either received or opted out of receiving appropriate pensions guidance before proceeding with their application to access their pension.
This followed a similar consultation launched in May by the Financial Conduct Authority for contract-based arrangements.
Pressed by Work and Pensions Committee chair Labour MP Stephen Timms to give a target percentage for uptake of Pension Wise advice, Fairs repeated that it was “a difficult question to answer” as “we don’t have an accurate picture of each individual’s retirement savings”.
“I think that take-up rates for the Money and Pensions Service and Pension Wise could be higher. I can’t give you a precise percentage of what that would be,” he said.
Stronger nudge has not been tested
Timms highlighted that the “stronger nudge” proposed by the FCA in its consultation has not been tested.
Sarah Pritchard, executive director of markets at the FCA, said that the stronger nudge was informed by some “limited testing” carried out in 2020, “which showed that if you make [guidance] seem like part of the consumer journey you can increase take-up rates”, but she acknowledged that “we haven’t conducted any separate testing, other than the testing that was carried out in 2020”.
Timms pointed out that the stronger nudge “goes further than the nudges that were tested”, and asked whether that should now be addressed.
Pritchard said: “If we go further than the proposals for the stronger nudge […] we would need to do a cost benefit analysis, and testing is obviously something that can support that.
“We are actively considering the responses that were received in the consultation period, and I wouldn’t want to at this stage and say anything further of where we might come out in terms of the final position.”
Auto-appointments would be challenging
Pensions Expert has reported previously on fears that the stronger nudge could lead to poor member outcomes, not least because of the burden they could place on scheme administration.
The DWP’s consultation proposed that scheme administrators should be in charge of organising and booking the Pension Wise appointments, which Girish Menezes, head of pensions administration at Premier, warned was an “unworkable requirement”.
The Work and Pensions Committee briefly discussed the idea of auto-appointments, which would see members automatically booked in with Pension Wise to receive guidance.
Pritchard said, however, that “we don’t think it’s appropriate for the FCA to step into that space and to mandate it” — though, when asked, she said she was open to considering the possibility of a trial.
“I don’t think that the stronger nudge itself is sufficient to drive up take-up rates. We do want to see how the stronger nudge, potentially cooling off periods, or any other responses that we’ve had into our consultation develop.”
Jon Greer, head of retirement policy at Quilter, said: “Low levels of Pension Wise guidance appointments will naturally be of concern to members of the committee.
“The FCA’s stronger nudge proposals are a positive step forward as they will remove a stage in the process by giving providers direct access to the MaPS booking systems. We’ll wait to see whether these changes do in fact boost Pension Wise guidance, but trials suggest it could be an effective policy intervention.”
On the question of auto-appointments, Greer warned that “mandating appointments for those approaching retirement age” could have the opposite effect to that intended.
“It could well be perceived by savers as yet another barrier to accessing their pension pots, particularly if someone has already made a decision on how they want to access their money,” he said.
“Plus, it remains to be seen whether Pension Wise has the capacity to scale up their service to the levels required to offer guidance services on an opt-out basis, without sacrificing the quality service levels that make the sessions effective in the first place.”
FCA U-turns on ‘decoupling’ 25 per cent tax free lump sum
Separately, the committee heard that the FCA has changed its view on the appropriateness of decoupling the tax-free lump sum available to members from the rest of their pension pot.
The watchdog had previously encouraged the government to consider decoupling the lump sum after its 2018 Retirement Outcomes Review revealed many members are so focused on obtaining the tax-free part that they pay little attention to the rest of their pension pot.
“Separating the decision to take the tax-free cash from the need to move into drawdown will let consumers put off deciding what to do with the rest of their pot, until they are ready to focus on it. However, this would require major changes to the pension tax regime and we recognise that there are detailed policy and practical issues which the government would need to consider,” the regulator said at the time.
Asked by Timms whether such a move was still advisable, Pritchard appeared to row back from the suggestion, however.
“Firstly I would say that behind the question lies the concern that many have, and that we have, around what consumers do with the 75 per cent, because we believe that people are focused on accessing the 25 per cent and then not making active decisions around what they could do with the remaining 75 per cent of the pension pots,” she said.
“Previous data that we have [stated] that around a third of people are unaware of where the rest of their pension was invested, and the majority are focused simply on accessing the 25 per cent.”
However, she said it was not “clear” whether decoupling would have a positive effect, adding that the introduction of investment pathways was designed in part to solve these problems.
“For those that are entering into drawdown and are non-advised, providers are asked to ask consumers to choose options in terms of what they are planning to do with their money for the next five years,” Pritchard explained.
It is “early days for investment pathways”, she said, and that the FCA has committed to a post-implementation review to take place in February 2022.
Guidance ‘stronger nudge’ could lead to poor member experience
The proposed rules requiring trustees and scheme managers to “nudge” individuals to obtain guidance when accessing their pension will cause administration mayhem and could lead to poor member experience, industry experts have warned.
“Very early indications from Association of British Insurers’ data show that people are taking up solutions that are offered. And so we are hoping that will change consumer behaviour and encourage people to make more accurate decisions so that they’re not automatically put into cash or cash-like investments,” she said.
“Ultimately, there are tax implications around the 25/75 per cent split. So that would be a matter that the government and other policymakers would need to consider,” Pritchard continued, adding that the FCA is “hopeful that investment pathways will start to show a change in consumer behaviour”.
Pressed by MPs on this point, she added: “At this stage, I don’t think we are saying that there is a need to decouple in order to ensure that consumers take more active decisions around the 75 per cent.”
