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Yvonne Braun speech at the APPG Pensions Inaugural Lunch and Election of Officers

7 July 2015


Yvonne BraunMany thanks Mr Chairman for your kind introduction. It is a pleasure to be here to update you on Freedom and Choice.

Some people occasionally say that politics should be taken out of pensions. Not us: we want an engaged UK Parliament with an active interest in developing long-term savings policy on a cross-party basis and the APPG is an important part of that.

In the next few minutes, I want to focus on three themes:

  • What has actually happened so far?
  • What do we need to address that’s not working to make sure people can benefit from Freedom and Choice?, and
  • What's next?

In terms of what has actually happened so far, it is time to correct the story on Freedom and Choice. Almost 100 days into the reforms, the vast majority of customers have had a successful experience, getting hold of their provider easily and finding it straightforward to access their money.

The FCA's own figures show that 60,000 people have taken advantage of the pension flexibilities, transferring £1 billion out of pension funds through accessing either their whole pot as cash, or opting for a series of cash lump sums.

We will release our own updated statistics in less than a week’s time which will build on this picture.

All our members are offering full cash withdrawals; three quarters are offering either partial withdrawal or drawdown; and 60% are offering both.

So the freedoms are working absolutely as intended - tens of thousands of people are accessing their pension savings in the way that suits them.

This comes as no surprise to us because we know how incredibly hard providers have worked to get ready for the changes. With much less than one year to implement – in some cases only weeks and indeed days of clarity about requirements – providers spent £200 million in changes to IT systems, call scripts and staff training.

And in the first month of the freedoms, they took over 1 million calls, 80% more than they would normally expect.

There have been some cases where people have had problems getting hold of their money, and I’ll cover them very shortly. We take challenges very seriously where they arise, but we must not allow the experiences of a small minority to characterise what is so far a positive experience and a popular Government policy.

So where have consumers had difficulties getting hold of their money?

These are mostly people with "safeguarded benefits" who want to take their pot as cash, where their guarantee is valued at £30,000 or over. These are usually guaranteed annuity rates, where their original pension contract stipulated the annuity rate consumers would be entitled to.

These can be extremely valuable benefits. Rates can be double what people might be able to achieve in current market conditions.

The DWP and the FCA took the view earlier in the year, that people with these benefits who want to access Freedom and Choice have to take regulated financial advice so that they are fully aware of their entitlement, and have the benefit of a professional opinion.

However, some people in this situation are unhappy about this because they feel that advice is too expensive, or because they can't find an adviser to advise them. It has become apparent that quite a few advisers are reluctant to offer advice in these circumstances, as they are concerned about future liability. In our view, regulated financial advice remains very important to get the benefit of a professional opinion. But clearly we can’t leave people stuck in a cul-de-sac trapped between regulatory rules.

This is one of the reasons we wrote to the Chancellor and the Chief Executive of the FCA with the ABI’s Action Plan just over two weeks ago. We are advocating a solution where a customer control mechanism takes the place of mandatory regulated advice. It could be delivered by Pension Wise through a specific guidance session about the risk of giving up this entitlement, and this would reduce the scope for people making uninformed decisions.

Once customers have had this additional session, providers would then be able to carry out customer wishes without fear of future redress action or retrospective regulatory action where the correct steps have been followed. We would like to see this customer control mechanism enshrined in a protocol agreed with the FCA and the Financial Ombudsman Service.

There is a broader point here, and it is about responsibility - and liability - for choices. And we need to be honest here.

It is a given that some people, maybe even many people, will make decisions they will later regret, possibly because their personal circumstances change in ways they did not anticipate when they exercised their original choice.

In fact, auto-enrolment is built on the premise that the state needs to force people to act in their own long-term interest. And the FCA is increasingly trying to regulate with these behavioural principles in mind.

But that is arguably fundamentally at odds with a liberal reform the driving principle of which is to trust people with their own decisions.

The same behavioural forces that have led to the introduction of auto-enrolment will be at work in the way people make decisions on Freedom and Choice.

It may not be buying a Lamborghini but it may be a decision to spend now, rather than hold money back for later or buy a guaranteed income. Five years later, someone might regret that decisions, say to their provider "you shouldn't have allowed me to do this", and take them to the Ombudsman Service.

This is why we would like to see the FCA conduct a broader review of the balance of responsibility between customers and providers in the light of pension flexibility.

This review should ensure there is a common understanding across Government, regulators and the Financial Ombudsman Service about the extent to which consumers take responsibility and indeed liability for their own decisions under Freedom and Choice.

This also needs to include trust-based workplace pensions. There remains a glaring disparity between the contract-based market and the trust-based market. This is true not only for the requirements in terms of risk warnings which are not aligned between the FCA and the TPR.

More fundamentally, we know from our members that many trustees take the view that giving people Freedom and Choice would mean they are not acting in the members’ best interests. Indeed, the NAPF’s recent survey shows that fewer than half of trust-based schemes offer full cash withdrawal. Only around 1 in 5 offer partial cash withdrawals. Where these options are not available, people have to transfer their entire pot to benefit from the freedoms.

We have many members who offer all the flexibilities and also provide a bundled pension service to trustees. However, some trustees using these services have decided not to offer these flexibilities to their scheme members, other than letting them transfer their entire pot.

I sympathise with trustees who are concerned people might take decisions against their own best interests – but we need to be clear that this is not the intent of the policy. And people’s experience should not differ depending on the legal structure of the workplace pension they are in.

This is why we need an urgent review to bring clarity about the role and degree of responsibility for both trustees and pension providers in supporting scheme members and their access to flexible options.

We also want to see data published about Pension Wise, and marketing for this excellent service to re-start. Why, nearly 100 days into the implementation of the policy, do we have provisional early data on everything except the performance and take-up of Pension Wise? The industry wants the service to succeed given we fund it, and the more people use it, the better equipped they will be to make use of the freedoms.

We want to work constructively with the regulators and Government to tackle the outstanding problems, and that is why we have called for a Government / industry Joint Task Force to deal decisively with the remaining issues.

For our part, we know that one of the problems of the sector is the complexity of the language used, and we are absolutely committed to ensuring there is clear and consistent language describing products and services.

Earlier this week, I invited a number of people round this table to form a Steering Group on pension language, which will build on the excellent work that has already been done by some of the organisations here today, not least NEST and Pension Wise and The Pensions Advisory Service. I hope to report back to you on progress made by the end of the year.

So what’s next?

The Government has committed to introducing a secondary annuity market from next April.

We have warned against a headlong rush towards this deadline. Why?

Because, whilst we support these reforms in principle, there are formidable challenges in establishing this market, and in ensuring adequate consumer protection.

There is no point in getting people’s hopes up that they can sell their annuity next April to a third party only then to find that the legal and consumer protection questions still haven’t been sorted. And the key issues that need resolving for Freedom and Choice – around advice and guidance - need resolving for this market also.

So let’s learn the lessons from the implementation of freedom and choice, and take sufficient time to build the appropriate regulatory regime, to give this market a chance to succeed.

Finally, let’s not forget there is still much more work to do to tackle the central question: How we can build a savings culture to make sure future generations - without defined benefit provision, with higher levels of debt, and likely to live even longer - can have a dignified and secure retirement.

Freedom and Choice has not made these big questions go away – the ABI and our members are committed to tackling them, and we look forward to working with many of you around this table.

Last updated 01/07/2016