More advice needed on ‘fiendishly complicated’ pension freedoms

Experts providing oral evidence to the committee’s ‘Protecting pension savers – five years on from the pension freedoms’ inquiry said Pension Wise should be given an expanded role, with an “auto-booking system” touted as a solution to low uptake levels. 

Separately, the committee heard that much more work needs to be done to ensure members understand the “fundamentals” of collective defined contribution schemes, the worst examples of which resembled “Ponzi schemes”, one panellist said.

The problem our member firms have is there’s no clear boundary of the definition between advice and guidance. And even the FCA said this is impossible to define a couple of years ago

Renny Biggins, The Investing and Saving Alliance

Pension Wise and the ‘midlife MOT’

Asked by committee chair Stephen Timms to set out the kind of information people need to make good decisions, and who should provide it, Chris Brooks, head of policy at Age UK, said “freedom and choice” had proven to be “fiendishly complicated”.

“It has the potential to cause a lot of problems. The majority of people aren’t familiar with pensions. It’s a new thing, a series of big decisions that they’re likely to have to make, so it is important that information is provided impartially to them,” he said.

Though pension schemes know their members best, the information they are able to provide might not be impartial. The Money and Pensions Service, and especially Pension Wise, have a vital role to play, Brooks continued.

Renny Biggins, head of retirement at The Investing and Saving Alliance, pointed to the current low levels of member engagement with Pension Wise and called on pension providers to do more.

“Speaking to our member firms, they really want to go further than what they currently do and help their members,” he said. 

“Typically, if you think the first port of call for an individual is their pension provider, and they’re normally told ‘we can’t really help you, you’ve got to go somewhere else’. And there’s a break in that journey.” 

Biggins continued: “The problem they have is there’s no clear boundary of the definition between advice and guidance. And even the [Financial Conduct Authority] said this is impossible to define a couple of years ago.

“So they really want to do more, but because they’re so concerned about straying into the advice territory, that they end up being ultra cautious and doing less for the individual than perhaps they could do.”

Laurie Edmans, Commissioner at the Financial Inclusion Commission, and Joe Dabrowski, deputy director of policy at the Pensions and Lifetime Savings Association, both stressed the need for more advice to be taken before (rather than at) retirement, with Dabrowski specifically advocating for a “midlife MOT”.

Yvonne Braun, director of policy, long-terms savings and protection at the Association of British Insurers, seconded the call for an expanded role for Pension Wise and the suggestion that pension providers should be allowed to do more.

She also touted an auto-booking system as a potential solution to the uptake problem.

Investment pathways are no substitute for advice

Committee member Shaun Bailey MP asked whether investment pathways could ever be an appropriate substitute for guidance and advice, or whether there “is going to have to be a trade-off between advice and guidance, and pension freedoms”.

Edmans said his experience as chair of Zurich’s independent governance committee told him that investment pathways cannot serve as a replacement for advice and guidance. 

“Do they constitute a significant improvement on the position of a very substantial number of people as things stand? Yes, they do,” he said. 

“The problem, as I understand it from the FCA when they introduced the concept, was that too many people were doing something which sounds crazy to anybody like the panellists here, who’ve spent their life steeped in this stuff. But it’s very logical to more normal human beings.”

Investment pathways are using pension freedoms to take their money out of soundly invested pension funds well-managed by trustees, but that does not remove the need for sound advice, Edmans said.

Biggins concurred: “The ideal situation would be everybody taking regulator advice, and the next best situation is with some people taking regulated advice.

“We’re getting a big take-up of people taking effective guidance; are the investment pathways a good alternative to either of those? No. But are they a step in the right direction? Absolutely.”

He cautioned that investment pathways are not without risks of their own.

“For instance, the pathway won’t tell you what a sensible level of withdrawal is. People are still exposed to risks and [have to] make decisions. So it’s not a safe harbour by any means,” Biggins added.

Worst examples of CDC are ‘like Ponzi schemes’

Good quality financial advice can also reduce or remove the need for complex hybrid products, the committee heard.

Brooks said past research into the apparent lack of product innovation following the introduction of freedom and choice suggested that products are not actually that important.

“If you have a good financial adviser, they can use what’s already there in terms of drawdown and different annuity products to piece together the kind of retirement journey that can help meet your objectives throughout your later life,” he explained.

He said much more time should be spent trying to replicate that for the “non-advised” market, which “is completely without the tools necessary to help them take the right decisions to meet their circumstances and to meet their personal needs. I think the question is less about products, but more about what support is available.”

Nigel Mills MP asked whether CDC schemes represent a “happy compromise” between DC and defined benefit models, but Brooks said it is still “early days” for CDC.

He and Edmans both cited risk pooling as an appealing feature of CDC schemes, but Edmans highlighted evidence from both the UK and the Netherlands showing that members are not comfortable with the variability of “with profits” products such as CDC.

“Product providers or scheme trustees will be wary of being considered to have raised expectations that are not realised,” he said.

“History shows that people are generally quite content to see their benefits levelled up. But they’re not nearly so content to see them level down.”

Dr Julia Mundy, member of the Financial Services Consumer Panel, agreed. She said: “Essentially, what could happen here is that the risks currently being borne by individuals actually shift up to society if people aren’t getting the returns they want.

“There are lots of potential problems with CDC; they can in the worst cases begin to look like Ponzi schemes. So they do need to be properly thought through and implemented before being let loose on people as yet another option that they don’t understand.”