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MPs demand default drawdown by April 2019: full report

We have summarised all the key points of the work and pensions committee's lengthy pension freedoms report, such as demands for default drawdown to be offered by providers, including Nest, as well as a new charge cap. Plus all the industry reaction.

MPs on the work and pensions select committee have demanded that providers be forced to offer default drawdown policies to savers by April 2019.

In the final report of its inquiry into the pension freedoms, the committee said providers should spend the next year preparing the solutions for their 'core customer groups.'

'We recommend every pension provider offering drawdown is required, by April 2019, to offer a default decumulation pathway suitable for their core customer group,' it said.

The MPs also said default propositions should be 'subject to oversight by existing independent governance committees and subject to the same 0.75% charge cap already in place for accumulation in automatic enrolment.'

The committee's report recommendedthat government-backed auto-enrolment provider the National Employment Savings Trust (Nest) be allowed to provide its members with default drawdown solutions, subject to assurances given about its ability to repay the government loan which funds its operations. 

Commenting on the report's publication, committee chair Labour MP for Birkenhead Frank Field (pictured) said:

'Automatic enrolment has been a runaway success, bringing millions of people on board in saving for their retirement,' he said.

'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.'

You can click on to read all the key points from the committee's report.

MPs on the work and pensions select committee have demanded that providers be forced to offer default drawdown policies to savers by April 2019.

In the final report of its inquiry into the pension freedoms, the committee said providers should spend the next year preparing the solutions for their 'core customer groups.'

'We recommend every pension provider offering drawdown is required, by April 2019, to offer a default decumulation pathway suitable for their core customer group,' it said.

The MPs also said default propositions should be 'subject to oversight by existing independent governance committees and subject to the same 0.75% charge cap already in place for accumulation in automatic enrolment.'

The committee's report recommendedthat government-backed auto-enrolment provider the National Employment Savings Trust (Nest) be allowed to provide its members with default drawdown solutions, subject to assurances given about its ability to repay the government loan which funds its operations. 

Commenting on the report's publication, committee chair Labour MP for Birkenhead Frank Field (pictured) said:

'Automatic enrolment has been a runaway success, bringing millions of people on board in saving for their retirement,' he said.

'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.'

You can click on to read all the key points from the committee's report.

Wealth squandering

In the final report of its inquiry into the pension freedoms, the parliamentary work and pensions committee argued that a raft of measures was needed to protect savers from bad retirement decisions. 

While the committee noted that there seemed to be little evidence of people 'frivolously squandering' their wealth, it noted that this outcome did not mean either that people were making good choices.

What the report said:

'There is little evidence that savers are frivolously squandering their life savings. But that does not mean that people are making well-informed pension freedom decisions in their own interest. Too many people are withdrawing their pension pots in full to leave them resting in low interest cash bank accounts.'

Freedoms philosophy

Throughout the past few weeks New Model Adviser® has been doing its own mini-investigation into the pension freedoms.

One of the topics that has divided opinion the most is whether it actually makes any sense to default savers into pension saving at the auto-enrolment stage, and then leave them to make so many decisions independently when they are about to retire amid risk, complexity and potential loss. 

The committee also identified this issue, and showed modelling of the difference to a retirement income that different unadvised drawdown withdrawals could make.

What the report said:

'Nest, the government-sponsored workplace pension scheme, said there was "an obvious disconnect between the assumptions about consumer behaviour" underpinning the two policies.'

'We modelled the difference it could make if an individual with a pot of £50,000 opted to take-out £3,000, rather than £2,000, a year. Taking out £3,000 a year, an individual would run out of money within 16 years, well below average life expectancy at age 65, receiving total income of £52,257. An individual withdrawing £2,000 a year would run out after 29 years, receiving total income of £67,543.'

Sports cars and spending

As New Model Adviser® had previously suspected and reported, sales of Lamborghini sports cars have not spiked as a result of the pension freedoms.

The committee noted this too.

What the report said:

'There was little evidence, however, that people are squandering their life savings on Lamborghinis.'

Well that settles that then (again).

'Misguidedly cautious'

Rather than spending all their money recklessly, the committee said instead that it was concerned that people were being overly cautious.

What the report said:

'Rather than being reckless in their use of withdrawn pension savings, there is instead evidence that many people are being misguidedly conservative. The FCA found that 32% of people who withdrew a pot in full chose to save the largest share of it in standard savings products like cash bank accounts and premium bonds.'

'These are likely to have lower rates of return than pension saving as well as potentially higher tax liabilities.'

Tracking and monitoring

Pension commentators expressed concern from day one of the pension freedoms that it would be difficult to keep track of precisely what was going on with the policy. 

For instance, Hargreaves Lansdown head of retirement policy Tom McPhail wrote to the government in 2015 to express concern that monitoring the success and/or failure of the pension freedoms from tax receipts alone was not enough to provide a proper overview of the policy.

It seems that in some respect the committee has long heeded these concerns, but was dissatisfied by the government's lack of action. 

What the report said:

'That committee recommended the government initiate "a rolling research programme to track the longer-term consequences of pension freedom decisions." While the government began publishing a wider variety of data about pension freedoms in response to that report, it has not yet acted on that recommendation.'

Target tribulations

As long as expressing concern about the government's lack of policy monitoring of the pension freedoms, the committee also said it had failed to state what its explicit aims were for the future of savings policy.

What the report said:

'The ABI [...] told us that the government had not stated a purpose of pension freedoms, or a "clear long-term strategy for longterm savings". Not only are the outcomes of the pension freedom reforms not being adequately monitored, it is not clear what the government wants those outcomes to be.'

Popularity problems

The pension freedoms sent drawdown into the mainstream.

Brilliant, you may argue. But the committee has highlighted its concerns about mass drawdown purchase by people who may not fully understand the consequences of their actions.

It also noted a behavioural bias on the part of people who were more likely to accept products from their existing provider rather than shopping around or receiving regulated financial advice (or both).

What the report said:

'We are also concerned by large numbers of people buying drawdown products—which carry investment risk and can run out—without fully understanding the consequences. Consumers who do not take financial advice on drawdown tend to take whatever they are offered by their incumbent pension provider.'

Shopping around

It is the problem that has plagued the retirement industry for years - long before pension freedoms were ever a thing. 

And yet, as the committee noted in its report, there seems to be very little progress on promoting competition on the open market, and shopping around. This problem seems to be compounded by a supposed lack of product innovation, which was also raised by the committee in its report.

What the report said:

'The government hoped that a competitive and innovative market would meet consumer needs. There is little evidence of this: too many drawdown customers are not shopping around and do not understand their options.'

Product complexity

Readers of the committee's report may get the distinct impression its members felt little had changed since the days of inflexible retirement options in the pre-pension freedoms world. 

Indeed, as the committee noted, 'complexity' of products and lack of consumer engagement were, in 2013, found to be key failings in the accumulation market by the Office of Fair Traiding.'

What the report said:

'They concluded that market was one of the weakest they had analysed. Auto-enrolment has helped remedy that market by harnessing inertia and removing the complexity of decision making by simply defaulting individuals into an appropriate workplace pension scheme. The drawdown market bears many of the hallmarks of the accumulation market prior to auto-enrolment.'

Plus ça change, plus c'est la même chose?

 

Default decumulation

Though it has encountered opposition to its proposals surrounding default decumulation options for those it thinks cannot afford bespoke financial planning and advice, the committee has stuck to its guns regarding the availability of default options.

The committee added that, as part of its evidence to the inquiry, the Financial Conduct Authority (FCA) apparently submitted evidence suggesting it was considering making default pathways for mass market consumers compulsory.

What the report said:

'Few providers currently have default pathways. Christopher Woolard, FCA Director of Strategy and Competition, said that this was unsurprising given that FCA rules "do not really create the idea of a default." The FCA confirmed that they are considering compelling default pathways as a means of improving outcomes for drawdown consumers.

"We recommend every pension provider offering drawdown is required, by April 2019, to offer a default decumulation pathway suitable for their core customer group. These would be subject to oversight by existing independent governance committees and subject to the same 0.75% charge cap already in place for accumulation in automatic enrolment."

What next for Nest?

The National Employment Savings Trust (Nest) is the government-backed auto-enrolment provider, established by a loan from the Department for Work and Pensions.

Nest has been considering its role as a potential provider of decumulation solutions for some years now. In 2015 it published a paper which suggested it could design a form of drawdown with guarantees built in for its members.

However, the committee clearly encountered scepticism about Nest's ability to behave as a product provider given its dependence on government money.

The committee recommended Nest should be allowed to provide decumulation pathways for its members, provided Nest can prove it is still able to repay its startup loan.

What the report said:

'We recommend that the government allows Nest to provide decumulation products from April 2019, provided it remains assured of Nest's ability repay its startup loan. This should include establishing a default drawdown pathway, in line with our wider recommendation. In keeping with the spirit of pension freedoms, savers would remain entitled to move their money wherever they wished.'

Innovation nation?

One of the hopes that was expressed when the pension freedoms were announced was that providers would leap to innovate in the product space. 

However, according to the work and pensions select committee even the FCA admitted that this just has not happen. 

What the report said:

'In introducing pension freedoms for the decumulation phase, the government argued that competitive pressures would stimulate innovation in the market, prompting the "development of new products that better suit people’s changing needs."'

'Nearly three years on from the introduction of pension freedoms, we heard general acceptance that such innovation has been at best sluggish. The FCA told us "product innovation has been limited to date." Peter Vicary-Smith, chief executive of Which?, described the performance of industry as "pretty lamentable so far."'

Robo-recommendations

It seems, despite the relatively undeveloped regulatory backdrop against which such innovations could take place, the work and pensions select committee is broadly in favour of automated financial advice (robo-advice).

The committee said in its report today that it believed technological innovations would act to support consumers as they passsed through a coherent framework, propped up by robo-advice.

What the report said:

'In earlier reports, we recommended a free and impartial guidance appointment as default before people access their pension pots.

'People who have taken guidance are more likely to then take independent financial advice. This is a wise choice for many, but can be expensive for those with smaller pension pots.

'Technological innovation has a clear role in filling that gap. We recommend the Financial Conduct Authority report on outcomes from automated advice, with a view to reassuring potential customers that it can be a useful service.'

Pension passports

We all know the story. You get to 55 and you pension provider sends you a massive 'wake-up' pack. 

The committee - as ever - is having none of this, and remains committed to so-called 'pension passports' - single page summaries of pension entitlements that explain clearly what a member's entitlement is or will be. 

What the report said:

'Trials show that single page pension passports increase consumer engagement with pensions options. We recommend that pension providers are required to issue them.'

Mid-life MOTs

The committee heard evidence from Citizens Advice head of service development Andrew Seagar, who said that the key to increasing early engagement with retirement outcomes was 'to get people talking about pensions as a social norm.'

He called for the introduction of a 'mid-life MOT', which would give individuals the chance to review their financial 'health' with enough time to take action were anything amiss. 

Clearly the committee believed this was an idea compatible with the role of financial guidance.

However, it did caution anyone who thought this would be a good alternative to it.

What the report said:

'A mid-life MOT at age 50, giving someone time to reassess their approach to retirement saving, is a good idea. Where firms and providers are open to providing such an option, this is to be welcomed, and we would encourage individuals to make use of them.

'Experience suggests, however, that take-up will be mediocre at best, and there is no obvious mechanism for nudging people towards them. The introduction of mid-life MOTs should not be mistaken for something likely to have a transformative effect on consumer behaviour.'

 

Dashboard decisions

The pensions dashboard is a concept that has been around for a while.

The idea is that members should be able to monitor all their pension savings in one place. But progress, as the committee said in its report, has been 'pedestrian.'

There is also a debate on. Should this idea be a single state-backed entity to which providers insert all their data for members to see where relevant? Or, should it be a fin-tech template that different providers can manipulate and change for their own ends.

The committee said in its report that it was firmly of the opinion it should be the former.

What the committee said:

'The concept of pensions dashboards has broad support across industry and Government.'

'Progress towards their creation has, however, been pedestrian. Two previous reports by this committee called for the introduction of a dashboard, with the latter, the October 2015 report on pension freedoms, stating it was "long overdue." We recommend that all pension providers are mandated to provide necessary information to the pensions dashboard, with a staged timetable to enable smaller legacy defined benefit schemes time to comply.'

'We recommend that the government introduces a single pensions dashboard, hosted by the forthcoming new single financial guidance body, funded by the industry levy and in place by April.'

Industry reactions: Webb responds

Steve Webb (pictured), who was pensions minister at the time the pension freedoms were introduced, responded to the report by saying that many of its recommendations threatened the spirit of the policy.

'These recommendations would destroy the spirit of pension freedoms,' he said.

'The whole reason for giving people "freedom and choice" at retirement is that everyone has different circumstances, needs and objectives.

'The idea of a standard default makes sense when people are building up pension saving, but not in the diverse circumstances of later life.  In particular, people may have built up several different pension arrangements with different providers and schemes.  It would be impossible for an individual pension provider or scheme to know what was the best option for a saver when they know nothing about these other pensions.'

Industry reactions: The ABI 

The ABI's director of long-term savings policy Yvonne Braun (pictured) responded to the report by specifically addressing its concerns about a centralised pensions dashboard.

'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,' she said.

'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.'

Industry reactions: Nest

Commenting on the Work and Pensions Select Committee’s report on pension freedoms, Gavin Perera-Betts, Nest chief customer officer, said that Nest would continue to engage with the government on defaults and decumulations. 

'We welcome this report [...],' he said.

'Our priority is to make sure that our members, just like other savers, are looked after when they reach retirement.

'Most of our members want their pension savings to produce an income for life. Well-governed guided pathways can help achieve this goal by giving savers reassurance and security right through retirement, which is what they say they want.'

'This report and evidence from the FCA last week highlight the risks to savers if those pathways aren’t in place. We’ll continue working with government and industry to ensure our members have fair access to the sustainable retirement income options they need.'

Industry reactions: Hargreaves Lansdown

Discount broker Hargreaves Lansdown responded to the consultation by saying that default strategies were not appropriate for personal decisions in retirement. 

Commenting, senior pension analyst Nathan Long added that capping drawdown costs was not the solution for long-term decumulation policies. 

'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,' he said.

'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.

'How people can confidently navigate their retirement options and not risk running out of money is not answered by charge capping drawdown solutions,' he said.

'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.'

 

Industry reactions: Aegon

Aegon UK agreed with Hargreaves Lansdown about the issue of default decumulation strategies.

Commenting, head of pensions Kate Smith (pictured) said:

'The recommendation of a default drawdown option is inherently challenging given the increasingly variable nature of retirement,' she said.

'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.'

She added that it was 'questionable' whether Nest should be allowed to provide default drawdown, in which case it would compete with private sector providers. 

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