Single regulator and independent commission needed to protect pension savers

• Report: Progress with automatic enrolment and pension reforms
• Report: Progress with automatic enrolment and pension reforms (PDF 783KB)
• Inquiry: Progress with automatic enrolment and pension reforms
• Work and Pensions Committee

Responsibility for pension regulation is currently shared between the Financial Conduct Authority (FCA) and The Pensions Regulator (TPR).

Dame Anne Begg MP, Chair of the Work and Pensions Committee, said:

"The new pension flexibilities give savers the freedom to use their money in the way they choose and have the potential to make retirement saving really attractive. But savers need to be properly protected from being ripped off in frauds or scams, or suffering financial loss from making the wrong decision about how to use their pension pots. The pensions industry has not always done enough in the past to help savers make the right decisions.

What savers really need is a strong, single regulator to act in their interests. We are not convinced that the FCA is sufficiently focused on pensions. The comment made in evidence to us that it can’t 'stop fools acting like fools' does not inspire confidence in the FCA’s willingness to be proactive in protecting savers. The Government is coming round to our way of thinking about the need for a single regulator. We believe that the big shift to the new pension flexibilities in April means that it is now time to make this change, which we originally recommended back in 2013."

New independent pension commission

A range of issues are identified in the Report which the Committee believes would best be addressed by establishing a new independent pension commission, along the lines of the 2005-06 Pensions (Turner) Commission. This would be able to take the same evidence-based and inclusive approach to assessing the impacts of the recent pension reforms, and recommend further improvements where necessary.

Dame Anne Begg said:

"The scale and pace of recent changes in pensions policy have completely changed the retirement saving landscape. It is necessary to draw breath and review the extent of the changes and their implications.

A new independent pension commission would be able to identify any emerging risks, and explore with stakeholders how these can best be addressed. The Turner Commission brought political consensus, full involvement of stakeholders, and detailed consideration of the wider impacts of major pensions policy changes. The successful introduction of auto-enrolment is a product of this. The current reforms have not always benefited from the same careful approach. A new commission is now needed to provide coherence in pensions policy and to build public confidence and long-term stability in the system."

Protecting pension savers

The new flexibilities give savers much more freedom in how they use their pension savings, in particular by removing the obligation to convert pension pots into annuities. The Committee welcomes this but notes that it means that, from April this year, savers will be required to make decisions regarding their retirement savings which they may not feel equipped to take.

Dame Anne Begg said:

"The Government has set up the Pension Wise service which will provide free guidance at the point when savers can first access their pension savings. This is a welcome and necessary step. But it is unlikely to be sufficient in itself to protect all savers from financial risk, particularly given how complicated pensions are for people to understand and the pension industry’s poor past record in always acting in savers’ best interests."

Many witnesses argued that savers needed further protection, in addition to the Pension Wise service, through what has become known as the "second line of defence". This would require pension providers to ask savers a number of key questions about their personal circumstances before releasing money from pension pots, to ensure that they have thought through the consequences of their decisions, including the implications of any health conditions and the needs of dependants.

When the FCA gave evidence to the Committee in December 2014, it was not convinced of the need for additional protection of this kind. However, in January it announced that this duty would be placed on providers from April 2015.

Dame Anne Begg said:

"We are very pleased that the FCA has finally been persuaded to place a duty on pension companies to ask savers key questions to try to ensure they understand the implications of decisions on how they use their pension pot. But more still needs to be done to protect savers. One of the early tasks for the new commission should be to assess whether there are weaknesses and loopholes in the existing protections and recommend urgent action where necessary."

Age at which pension saving can be accessed

One issue which the Committee wants the new commission to explore is the minimum age at which individuals can take advantage of the new pension flexibilities. This is currently set at age 55, in line with current tax rules, and will rise to 57 in 2028, when State Pension age increases to 67.

Dame Anne Begg said

"Allowing people to take advantage of the new pension flexibilities 10 years before they get their State Pension could create unrealistic expectations about the age at which they can afford to stop working. Our view is that, given the significant tax relief provided for pensions, increased longevity, and the importance of ensuring that people do not underestimate the income they need in retirement, the age at which people should be able to access their pension pots should be changed to five years before the State Pension age, except where there are ill health grounds. This is one of the key issues the proposed new commission should look at."

Automatic enrolment (AE)

Automatic enrolment places a requirement on employers to enrol employees in workplace pension schemes. Implementation began in 2012 and the process will continue with existing smaller employers until 2017. The Report acknowledges that the process has gone well to date but it also identifies a number of areas where careful assessment is required.

It therefore recommends that the proposed independent commission should look at a range of AE issues. These include: the challenges of extending AE to smaller employers; the level of minimum contributions for employers and employees; and how currently excluded groups, such as self-employed people and those in multiple low-paid jobs, can be brought into pension saving more effectively.

The Chair said:

"Good progress has been made through auto-enrolment in increasing the number of people who are saving for their retirement, and the amounts being saved. But there is much more to be done. Four million employees will be brought into AE over the next few years and the small businesses that employ them will need proper support to meet their AE obligations. It is also important that everyone who can benefit from pension saving understands the advantages of AE and is encouraged to remain enrolled."

Recommendations

The report makes a number of further recommendations, including:

• The number of individuals leaving AE schemes after the initial opt-out period needs to be monitored, as early opt-out figures alone cannot be used as a meaningful measure of success in the longer term. [para 22]
• The Government has been slow to finalise the details for automatic transfer of AE pension pots and this is still not expected to be implemented until autumn 2016. The new Government should confirm plans for automatic transfers early in the new parliament and act quickly to develop workable IT solutions with the pensions industry. [para 45]
• The Government has made good progress in tackling some of the problems identified in the Committee’s 2013 report, including excessive and unnecessary charges in AE qualifying schemes. The introduction of the 0.75% cap on charges is welcomed. But more needs to be done to address the lack of transparency in charges, transaction costs, and high charges and poor governance in legacy schemes. [para 65]
• The proposed independent commission should assess the impact of the new pension flexibilities on the range, suitability and accessibility of retirement products and advise on necessary interventions if the market is found not to be operating in savers’ best interests. [para 75]
• Regulators should prioritise the introduction of a “pensions dashboard” to enable individuals to access consolidated information about all their pension saving in one place, ideally including both private and state pension entitlement, and its use by providers should be made mandatory. [para 108]

Further information

• About Parliament: Select Committees
• Visiting Parliament: Watch committees