My Lords, I will take all the amendments in my name together. At Second Reading, I welcomed the overall intention of the Bill, which includes the creation of a new type of pension scheme—a collective benefits scheme. Potentially, such schemes could provide individuals with a greater degree of certainty over the level of pension benefit they might receive. As they enter retirement, it could help them make better choices and informed decisions, but the accompanying new freedoms and choices for people also hold many greater risks. To understand these risks, people have to be very much better informed. If they are unable to manage their money effectively over what in this day and age can be a 40-year retirement, and if they are poorly advised or sold poor-value products, the impact on pensioner poverty more widely could be significant.
We have a narrow window of opportunity to ensure that these reforms work as intended because currently many people at the point of retirement still have the security of defined benefit pensions. Even so, the Pensions Policy Institute, of which I am privileged to be the president, has highlighted that 41% of people who are now aged between 50 and the state pension age—2.3 million people—have no DB savings and so are heavily reliant on DC savings to support their retirement.
On day one of Committee, the noble Lord, Lord Bradley, proposed a new clause on decumulation aimed at protecting savers who default into an annuity with the same savings provider. This was by providing safeguards for people who do not take advantage of the new flexibilities because, for them, an annuity remains the best product. It guarantees them a set income for the rest of their life. In his response to the noble Lord, Lord Bradley, the Minister reminded us that the recent FCA thematic review of annuities and the findings from its market study concluded that competition in the annuity market does not work effectively and consumers are not getting the most out of their hard-earned savings. These reports provided further evidence for the need for a route map through the annuity process for consumers, and the amendment moved by the noble Lord, Lord Bradley, would have established an independent annuity brokerage service to resolve this by providing scheme members with an assisted pathway through the annuity process, ensuring access to most annuity providers and minimising the cost. His amendment was withdrawn but perhaps we need to discuss this further because some sort of alternative navigation support across this fault line between guidance and advice must be necessary. Plainly, this is in the remit of the FCA, but the FCA itself has made it very clear that the supervision of guidance does not lie with it but with the Treasury, so there is something of a stalemate there.
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Last week’s debate also touched on the proposed role of the Pensions Regulator, as many of the annuities offered are bought by members of occupational pension schemes, using their defined contribution savings. These are provided by the FCA-regulated contract-based pension schemes. The Government, however, will define the exact role they see the Pensions Regulator playing in this busy landscape. I shall later come to how we might mitigate savers’ risks by having a second line of defence across all retirement income products.
In their earlier Amendment 30 to Clause 47, the noble Lords, Lord Bradley and Lord McAvoy, sought to mandate the Secretary of State each year to produce a report on the effectiveness of the guidance under Schedule 3, which would include the number of people who have taken up the guidance, the number of those eligible to take up the guidance who did not do so, and the effectiveness of the guidance in preventing instances of consumer detriment through the purchase of inappropriate products. My Amendment 34 similarly seeks to ensure regular monitoring and reporting on the outcomes of these reforms for everyone affected, whether or not they access the guidance. In particular, this reporting should include outcomes such as the number of people cashing in their pension pots in their
entirety and the number taking out draw-down or purchasing an annuity, all broken down by pension pot size. The guidance guarantee should be regularly reviewed to ensure that suitable information is there to make sure that people can make the important decisions that really suit their own needs.
On Amendment 35, as I mentioned earlier, another pressing challenge that will have an impact from next April on those approaching retirement is the advice and information envelope, which will underpin the decision-making process here. This and my remaining amendments relate to the proposals for and the regulation of official guidance for people approaching retirement.
Schedule 3 to the Bill places a duty on the FCA to create and regulate the advice and information part of the “freedom and choice” pension reforms in the shape of the guidance guarantee, which is a crucial part of these reforms. The noble Lord, Lord Newby, alluded to this in his response to the previous amendment, but my worry is that individuals are not aware of the existence of this guidance, and not obliged to seek it or to follow it if they find it. Many people will remain seriously ill informed, and, as we heard on day one, they may make the wrong decisions. We mentioned the Sunday Times article on this.
In particular, Amendment 35 seeks to ensure that the guidance service provided under the new rules takes into account all potential sources of income in retirement, especially given that defined contribution pension savings make up a significantly smaller amount of an average saver’s total retirement income than housing wealth. Indeed, some estimates put the housing wealth of older people in the UK at £1.4 trillion.
On Report in the other place, the Minister gave assurances that the FCA’s principle-based standards will require delivery partners to take into account various sources of income, including housing wealth, in the provision of guidance. I have reviewed, however, the near-final rules and standards recently published by the FCA in the annexe to its policy statement on retirement reforms and the guidance guarantee. I thank the Minister for very kindly making those available to us. I believe that these rules will need to be stronger if they really to better reflect the Government’s avowed intentions.
I welcome the fact that Part 1 of the standards—Standard 20—stipulates explicitly what the guidance must contain, including requesting information about the consumer’s financial situation—for example, whether the person is a home owner or renter—and personal circumstances that are relevant to their retirement options. However, there is no explicit reference to levels of housing wealth. While we can all sympathise with the Government’s reluctance to overpromise on what these relatively limited guidance conversations can be stretched to achieve, the guidance session should act as a prompt for people to consider their options for retirement funding. It would be remiss if this did not include a full picture of people’s financial health.
This amendment would ensure that the individuals providing the guidance service under the new rules were required to ask questions about other assets, including housing wealth specifically. I recognise that the guidance guarantee cannot and should not seek to
replace regulated advice, but, as I have said, it should act as a prompt for consumers to consider their full range of options.
Guidance also needs to cover interactions with lending. Research from Prudential found that one in six people planning to retire in 2014 will have debts. The main sources of debts are credit cards followed by overdrafts and bank loans, but they might also include mortgages. Age UK has found that while the proportion of older people with debt had fallen between 2002 and 2010, the average size of the debt had increased. Currently, lenders are unwilling to lend to older people and, in particular, to extend mortgage terms so that they are repayable after retirement. This could mean that more consumers have to repay debts when they reach state pension age. Many of those with a need to repay a mortgage post-retirement will have an interest-only mortgage. I received this information from Age UK and a lot of what I am reading now came from its very full briefings to me.
FCA modelling predicts that just under half of interest-only mortgage holders whose loans mature before 2020 will have a shortfall between their mortgage and their expected repayment vehicle. In the near term, there is a peak of mortgages maturing in 2017 or 2018, many of which were sold as endowment mortgages in the early 1990s. Some of these shortfalls could be significant. The FCA estimates that a third of those with a shortfall will have a shortfall greater than £50,000. It would be a missed opportunity if people were not encouraged to consider those wider assets.
In response to my question at Second Reading regarding the impact of any drawn down money on any subsequent means test for local authority care fees funding eligibility, the Government have said that money held in draw-down funds will be treated as providing notional income and will be treated consistently with annuity income; that is, it will be included in any such means test. I hope that more detail will be available shortly when the Department of Health publishes the draft regulations for care charging under the Care Act 2014, particularly if any such draw-down, despite having been spent, is retrospectively included under the intentional deprivation of assets rules. It is vital that the guidance guarantee makes the full implications here crystal clear.
On Amendment 37, consumers, and therefore guidance, should also take account of the position regarding state pensions. Using your private pension to take up options such as deferring state pension or buying extra state pension could provide much more income than buying an annuity, unless it would affect means-tested benefits. For example, deferring a pension may provide a higher income when it is finally vested, so the individual’s current and future income, assets and liabilities need to be taken into account. Lenders will have to be much clearer on how they will treat small pension pots, and this clarity should be a key part of best-practice guidelines that balance the interests of borrowers and of lenders.
Amendment 37 seeks to ensure that the guidance guarantee and financial advisers take state pensions and benefits into account when offering advice and support to people. For an individual retiring, using their private
pension to take up options such as deferring a state pension or buying extra pension could provide much more income than buying an annuity, unless it would affect means-tested benefits.
I turn to Amendments 39 and 40 together. Shopping around for income draw-down is likely to prove complex for many consumers. The Government really should consider introducing a cap on the level of charges for some products. However, it is not just about charges. Investment strategies will need to reflect the new flexibilities and cash held within a pension fund may actually lose money. For example, a money market fund held in a stakeholder pension has actually declined by 2% over the past five years. Both Government and regulators should ensure that scheme governance is strong and effective for the accumulation, saving and de-accumulation or income phases. These amendments seek to do that.
The range and impact of poor value products could increase with the increasing complexity of products on offer after the reforms come into effect. As we heard on day one, further examples can be seen in the recent findings from the FCA following its review of the retirement income market which showed that many consumers in the past have missed out on a higher level of payments from their annuity. In some cases this was because consumers had not been told about better value policies they could have taken out. In addition, a report from Which? and the Pensions Policy Institute believes that income draw-down will become the norm, rather than the exception. However, the research found that none of the alternative products to conventional annuities is currently suitable for the mass market, due to the costs and investment risks involved. It is crucial that this type of situation does not continue when consumers are presented with a far wider array of products when these reforms come into effect next April.
Building on the quality-standard idea, I believe that guidance alone will not be enough to ensure that everyone gets a good deal. The market has not served people with small to average-sized pension pots well in the past. Guidance should help many retirees make better decisions. I feel that the FCA needs to secure greater protection for individuals during the decision-making process, by including devices such as cooling-off periods and defaults. The problem is that, while the latter lie in the province of the FCA’s supervision, the guidance does not, so coherent co-ordination may prove difficult, especially as the FCA avows that it is not part of its consumer protection remit to do this.
The Pension Schemes Bill Committee in the other place heard evidence from a range of expert witnesses, including Dr Ros Altmann, the Government’s business champion for older workers, and representatives from the Financial Services Consumer Panel. They all called for the requirement of a second line of defence to underpin the guidance guarantee to be imposed on pension providers by the FCA. A second line of defence regulation would require pension providers to check crucial factors at the point when consumers accessed their DC pension savings. Specifically, they would have to draw the customer’s attention to a range of known risks which could have a negative impact on people’s finances on retirement, including outliving assets, running out of money, not providing benefits for a spouse on
death or missing out on additional income resulting from a medical condition or lifestyle factors. It would also require pension providers to offer a cooling-off period for people who ask to take out all their money in one go.
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As the consumer moves post-guidance into what the noble Baroness, Lady Drake, in last week’s debate called,
“the purchase or decision activity which flows from that guidance”,—[Official Report, 7/1/15; col. 366.]
it is a pity that the FCA seems to have ignored these calls for a second line of defence requirement and has decided that it will simply rely on its supervisory role, which merely ensures that pension providers are required to signpost customers to the guidance service and to encourage them to use that service. That is not the complete solution, in my view. At a meeting on 17 December, the Work and Pensions Select Committee pressed the FCA forcefully on the absence of a regulatory backstop or a second line of defence for consumers, who will first come into contact with the reforms in April. However, no clear answers were forthcoming on this point, which is very concerning, given the growing calls from Age UK, the ABI and others for the FCA to include such a regulation. While I understand that the guidance is not intended to address the specific situation of every consumer—that is the purpose of advice—no one wants the costs of shopping around to mean the imposition of unnecessary additional costs on either some schemes or members. I still think that I am on the side of the Select Committee, which at this point of the proceedings wondered why, rather than emphasising the demarcation issues here, the FCA,
“would not introduce a conduct rule around the second line of defence. Why not?”.
Instead of providers,
“asking customers whether they have taken the guidance and then asking them again, require them to ask those specific few questions about tax, about health—those questions that are needed to make sure the person has made an informed decision”.
This is such a high-stakes decision, with lasting consequences for individuals and their families, that I think some additional measures are necessary. Indeed, similar measures already apply in the case of many routine and far less significant purchases that people make. Will the Minister assure us that both the Treasury and the FCA will be made to work more closely together to ensure that a seamless information and guidance process comes into existence, for the benefit of all consumers? I beg to move.