My Lords, this amendment sets out a duty on the Financial Conduct Authority to protect savers accessing their pension savings during the actual decision-making and purchasing process, as distinct from a duty to protect savers receiving guidance from designated guidance providers. In particular, the amendment sets out that the FCA should require pension providers to take active, not just passive, steps to check that people are made aware of the factors that will impact their decision.
I will begin by highlighting the problem that drives this amendment. Steve Webb, the Pensions Minister, commented at the end of the Public Bill Committee sessions:
“To be clear, if we thought everything was fine in the world of retirement income choices the FCA would not be doing a thematic review of annuity sales practices or a retirement income market study … those studies are being undertaken because we are aware that there have been problems in this market. We are prepared to introduce further measures, if that is what the studies suggest”.—[Official Report, Commons, Pensions Schemes Bill Committee, 4/11/14; col. 309.]
I believe that that is exactly what those two studies suggest. Since the Bill arrived in this House the FCA has in fact delivered its two reports: the thematic review of annuity sales practices and the interim report on the retirement income market study. Perhaps I may capture the essence of what it reported.
The review found that annuity sales practices were contributing to consumers not shopping around, buying the wrong type of annuity or missing out on a potentially higher income. The consumers’ tendency to buy from their existing pension provider weakens competition. The FCA identified the non-adherence by providers to the ABI’s own retirement choices code. In fact, the ABI urged the FCA to replace its code with regulation because it recognises that with the new freedoms more needs to be done.
As to the FCA retirement income market study, that was initially focused on how to get competition working more effectively for consumers; but following the Budget the emphasis was shifted towards looking at how market conditions might evolve from the advent of the reforms in April 2015. Its interim report suggests that consumers will be poorly placed to drive effective competition; that the retirement income market is not working well; and that the introduction of greater choice
and potentially more complex products will reduce consumer confidence and weaken the competitive pressures on providers to offer good value.
Even after repeated analysis of these issues by the Treasury, the FSA, the FCA and others over a period of six years, and just three months away from the introduction of major reforms to the UK pensions framework in April 2015, too many consumers are still being failed by their providers. As my noble friend commented, the FCA research confirmed the well known biases that savers reveal that make them so vulnerable to being sold products that do not best meet their needs, and that the choices consumers make are strongly influenced by how options are presented to them. Martin Wheatley, the FCA CEO, said in a recent interview—published just this weekend—that the timescale to deliver the new freedoms and design suitable products was challenging; providers have been struggling to complete proper due diligence testing on their products.
Turning to the savers, the new freedoms bring with them an even greater onus on individuals to make an active decision about what to do with their pension pot. It is very important, therefore, that consumers are well placed to make decisions that are in their interests. We know the challenges to achieving this: provider behaviour; product design and complexity; savers’ behavioural biases; and financial capability. The noble Baroness, Lady Greengross, is president of the International Longevity Centre, whose new report on making the system fit for purpose reveals the extent of the limited knowledge of savers about relevant products and services, despite the new freedoms being just three months away.
The guidance guarantee is a key policy measure for helping people to navigate the complex retirement options arena from April 2015. I know that there are people working very hard to make its delivery a success. I certainly want it to be successful, as it will provide a very important service to savers. In support of that guaranteed guidance the FCA has confirmed that it will expect providers to check whether a customer has used the guidance service and encourage them to do so if not. It has also recommended that the pensions guidance service incorporates tools to support consumer decision-making. This provides a first line of defence against consumer detriment. The provision of guidance is extremely important, but what the customer does with the guidance also matters. The success of guidance can be achieved only by the whole industry working together. Some people will choose not to take the guidance even if encouraged by their provider.
The Government are very dependent on market behaviour to ensure the success of the new freedoms. Beyond guidance, the saver has to move into the process of making a decision and selecting or purchasing a retirement income route. It is what happens at that stage—the exchange between the consumer and the provider—that is causing so much anxiety.
This amendment is directed at that exchange between the provider and the consumer and puts a duty on the FCA to secure an appropriate degree of protection for the consumer at that stage. That is what is popularly referred to as the second line of defence, to mitigate the risk that savers make detrimental and irreversible choices. After the pension provider has asked the
customer whether they have accessed guidance, it should be required to make active interventions, not just the current passive and paper-based disclosures. The FCA reports show that these are clearly failing savers, particularly where they buy a product from their existing provider through inertia, rather than making an active choice. The FCA should require pension providers to take active steps to make people aware of factors passively referred to in the literature and key facts documentation, by asking key questions of the consumer to highlight such matters as the potential impact of health, income tax, dependants, longevity, investment risk and income needs though retirement. That will highlight factors whose impact can lead to poor choices if overlooked.
The FCA analysis, as my noble friend said, revealed that the take-up of enhanced annuities because of health factors by those who remained with their existing pension provider was just 5%, while for those who shopped around the take-up was 50%. That is strong evidence that consumers need an active prompt to consider factors that have a bearing on their incomes in retirement. It is all the more important because decisions on pension savings can be irreversible. This Bill and the Taxation of Pensions Act create unprecedented options for retirees, so the passive approach is no longer sufficient.
The FCA is expected to publish its final market study report in early 2015. It is consulting on certain proposals, as my noble friend detailed, and it will continue to monitor the market. However, this is a reactive approach, waiting to see what problems emerge, and the amendment is underpinned by the belief that prevention is preferable to later cure. With around 400,000 consumers expected to access the new pension freedoms in 2015, yet another review may be required without the additional protections proposed in the amendment, to discover why thousands of pension savers did not make good decisions or get good value for money.
The amendment would introduce a general duty on the FCA and allow protections in time for April 2015, but it would not prevent the Government setting such other further requirements as they considered appropriate in the light of how the retirement market evolved. As the noble Baroness, Lady Greengross, stated when moving her amendment, consumer advocates, industry groups, providers and members of the Work and Pensions Committee have all expressed concerns that, without a second line of defence, mis-selling and poor decisions remain a key risk.