The Work and Pensions Committee has today published a report calling for all pension providers to offer a single default drawdown option and all schemes, including DB, to be required to give data to a single pension dashboard.
The report on pension freedoms from the influential committee has called for FCA rules requiring accumulation pension providers to offer a default drawdown option, subject to the same 0.75 per cent charge cap and value for money obligations as exist pre-retirement. The committee, chaired by Frank Field MP, has proposed that these new rules be introduced by April 2019 and argues that the bar on Nest being able to offer drawdown to its 5m scheme members should be lifted.
Critics say a single default option would not work because people will retire at different ages with different objectives. They have also questioned whether Nest should be allowed to borrow more public money to fund the development of an at-retirement proposition.
The Committee says the case has been made for a single, publicly hosted pensions dashboard, covering state, defined contribution and defined benefit pensions. It says this should be funded by an industry levy and should be in place by April 2019.
It argues the multiple dashboards currently planned, hosted by self-interested providers, would only “add complexity to a problem crying out for simplicity”. Competition between pension providers over the presentation of the required information risks countering competition in the pensions market, it argues.
Instead, Government should mandate all pension providers to provide the necessary information to the single pensions dashboard, hosted by the new single financial guidance body – with an extended timetable for smaller legacy DB schemes to comply, it says.
The report notes that people who have taken guidance are more likely to then take independent financial advice – but that this can be expensive for those with smaller pension pots. It says the FCA should report on outcomes from automated advice with a view to reassuring potential customers that it can be a useful service, and strengthen the advice offer.
Committee chair Frank Field MP says: “Automatic enrolment has been a runaway success, bringing millions of people on board in saving for their retirement.We want to expand that success story so that everyone, no matter how they are saving, has a simple, suitable, default pension option, with a low, capped fee.
“From that solid base, those who want to choose other options would retain complete freedom to do so. They would be armed with a new range of clear, transparent information in making their choices.”
Aegon head of pensions Kate Smith says: “The recommendation of a default drawdown option is inherently challenging given the increasingly variable nature of retirement. The appropriate drawdown strategy for a 55-year-old versus a 65-year-old would look very different, as it would for a customer fully retiring versus one accessing their pension in stages whilst continuing to work. The pension freedoms mean people are accessing their savings in a wide variety of ways and a default risks catering to an average customer that in reality doesn’t exist.
“It’s questionable whether Nest should broaden its scope and offer default drawdown. It should be remembered that, unlike the rest of the pension industry, Nest is propped up by government loans. Building retirement income solutions will require more government capital and the loan extended, potentially undermining true competition in the sector.
“The recommendation that a single pension dashboard hosted by the public guidance body and in place by April 2019 is completely unrealistic. The new single public guidance body is only scheduled to be in place ‘no earlier than 2019’ and the pension dashboard is hardly likely to be a priority.”
ABI director of policy, long-term savings and protection Yvonne Braun says: “It is only thanks to the efforts and investment of the pensions industry that we have a prototype and are now able to talk about the practicalities of delivering a pensions dashboard for everyone to use. The industry’s focus in this project has been on how to best serve consumers and we are delighted Government is now taking forward its implementation. The priority must be to get an initial service up and running, supported by legislation compelling all schemes to provide data to the service.
“It may be that an initial publicly hosted service is a pragmatic place to start given the stated aim to deliver a dashboard in 2019. But it would be a huge missed opportunity if we adopt a single dashboard as the final destination. We know that people expect to be able to use sophisticated dashboards in the future, integrated with other services, that only the private sector will be able to provide.”
Hargreaves Lansdown senior pension analyst Nathan Long says:“The report really is a tale of two halves, striving for more confident pension savers at the same time as tailoring a retirement straight jacket. The committee found that pension freedom works well where savers and investors are equipped to make confident financial decisions, with simplicity of information a key ingredient to boosting understanding.
“Taking advice and guidance at the point of finishing work can be hugely beneficial, but does not include a complementary time machine voyage to pay more into your pension earlier on. The answer remains to encourage personal ownership of retirement planning at much younger ages.
“How people can confidently navigate their retirement options and not risk running out of money is not answered by charge capping drawdown solutions. Life after work can last over 40 years, so income and investment strategies have to be built for the long term. This also means any solution has to involve active investment management to adapt to changing market conditions.
“Guided drawdown solutions which couple the right investment strategy and the right income withdrawal approach are what the retire-as-you-go generation are crying out for. The word default should be banished from the decisions made at retirement, as hugely personal choices don’t lend themselves to a one-size-fits all approach. It is important to inject a healthy dose of realism into these decisions, as drawing more than the income naturally produced by your investments puts you at the greatest risk of running out of money in retirement.”
