Huw Evans: Future-proofing the freedoms: what next?

Introductory remarks by ABI Director General, Huw Evans, at the Future-proofing the freedoms: what next? webinar on the 18 November 2020.

 

 

 

This event is all really about taking the temperature on one of the biggest changes to pensions policy that the UK has ever seen.

And we know that the aim of freedom and choice is to ensure that people can enjoy flexibility in retirement, with some effective and considered protections in place to prevent poor outcomes.

It’s easy to say, it’s not as easy to achieve. But we must all commit more  to ensure the long-term sustainability of pension freedoms, so that it works for customers and indeed for providers in the long run.  At our Annual conference in February, we published a milestone report which:

• Looked back at the impact of pension freedoms, the benefits to customers and the risks so far.
• Assessed how well those risks have been mitigated, and what problems are still present.
• Presented a package of reforms to address the risks to savers.
• Looked forward to problems that could emerge in the future and how to fill some of the evidence gaps.

And our aim really was that in 2020, five years on from the introduction of pension freedoms, this is an opportunity really to review the landscape and start a discussion about what more can be done both to deliver the original aims of flexibility, while ensuring there is appropriate protection for customers in the future.

A look back: the introduction of the freedoms and actions to date

Before we look ahead, I think it’s important that we take a moment to reflect on the past five years and look at what we’ve learnt and achieved so far.  

I am sure we can all remember 19^th March 2014 – Budget Day – and our reactions as George Osbourne announced  

 “the most fundamental change to how people access their pension savings in nearly a century”. And for once, a politician was not exaggerating.

Now of course that huge change was announced without any consultation or prior warning. So, we were initially taken by surprise at the sheer scale of the reform, even though we welcomed its objectives.

But I think that surprise quickly turned into proactive and pragmatic action. Providers did rise to the challenge and implemented the pension freedoms within the one-year notice period; we were there every step of the way to support. From clarifying the initial position of pensions with Guaranteed Annuity Rates, to proposing models for the guidance guarantee, which later became Pension Wise, we made important contributions to the framework put in place.

And since that introduction, we haven’t been sleepwalking towards the five-year milestone that we find ourselves this year. There’s been substantial efforts from across the industry to make this work.  

And I am personally proud that the ABI has played its part with the long-term saving sector in helping get the freedoms off to a good start, and our work has fallen into three areas over the last five years:

Firstly, we’ve worked with providers to support customers through producing a range of guidance to improve communications, such as:

• a pensions language guide to help tackle jargon in the industry.
• A guide on tailoring communications, to better link communications to life events such as moments of transition and financial shocks.
• A good practice guide for in-retirement communications.
• And a guide to help firms to identify and support vulnerable customers, which we have followed up with ongoing work with the regulator in its draft guidance for firms.
• And I know that providers have invested substantially to support customers post-freedoms, including the development and roll out of online tools, calculators, videos and information.

Secondly, the ABI has led the way in a number of projects, which are vital to the success of the freedoms, for example:

• We’ve lead the industry on the development of pensions dashboards from day one, through our work leading the prototype project and since then, through playing a leading role on the Steering Group.
• We’ve collected extensive data from long-term savings providers, to provide an evidence base to inform decision making and to highlight causes for concern.
• We’ve commissioned a number of pieces research over the five years to help paint an accurate picture, including on the retirement landscape, customer engagement and how people are spending down wealth in retirement.
• And we’ve developed a blueprint for a drawdown comparison tool, which is now being taken forward by the Money and Pensions Service.

Thirdly, we’ve collaborated to shape the work of government and regulators in a way that I believe works for customers as well as providers.

• So, we’ve helped inform the work of the guidance bodies, the design of Pension Wise, the Financial Guidance and Claims Act, and the development and introduction of the Money and Pensions Service.
• We helped shaped a ban on pensions cold calling in efforts to curtail pension scammers.
• And we’ve provided detailed submissions to shape policy and regulatory developments, on things such as investment pathways, the Retirement Outcomes Review and DB-DC transfers.

And of course, we are not alone in these endeavours. We’ve seen substantial work from Governments, regulators, providers and other stakeholders too, which we are going to hear about and take stock of today.  This includes Bills passing through parliament, wide-ranging regulatory reviews, subsequent new rules, and a plethora of research to fill evidence gaps.  

What next: future-proofing the freedoms

So that’s the last five years, but what next.

Well we have come a long way since 2015, but this is still only the beginning. In February, we set out many recommendations of how we think the freedoms can be future-proofed, acknowledging that in our view the jury is still out on their overall success.

And in a year of unprecedented challenges that 2020 has been, it’s positive I think that we have already seen progress, with some of the recommendations that we made back in February being implemented or taking shape:

For example:

• We called on FCA and DWP to implement the lessons learnt from the trials of a stronger nudge to guidance. And we were pleased to see DWP published a statement of policy intent on this last month.
• We called for clarity from the Government on an expected increase in the Minimum Pension Age, and we welcomed that the Economic Secretary to the Treasury has now confirmed this will take place in 2028.
• We wanted The Pensions Regulator, TPR, to mandate employers and schemes to issue a warning letter to individuals about DB pensions before being able to transfer out. In April, TPR guidance recommended this, signed by TPR, FCA and the Money and Pensions Service.
• We called for MaPS to incorporate later-life into its pensions workstreams and to develop and offer a later-life review. MaPS has this week accepted the recommendation of its Challenge Group to develop a ‘later life checklist’ in response to Covid.

So good progress on a lot of the fronts that we highlighted earlier in the year, but there is without a doubt much more that needs to be done.

The last five years have given us a taster of the challenges, but it will be the decisions made over the next 15-20 years which will ultimately determine whether the Pension Freedoms are a success. The most difficult part is still to come.

And we should accept now that this won’t be easy for the following three reasons:

• Firstly, the next wave of people accessing the freedoms will have varying needs as work and home ownership patterns change, and the number reliant on DC rather than DB pensions continues to increase.
• Secondly, there is no one-size fits all solution for this diverse cohort. This means that a wider range of considered and flexible interventions will be needed to support the different forms of decision making required.
• Finally, and in my view perhaps the most difficult, we must deliver interventions for this cohort against the backdrop of what will be an extremely challenging economic environment with sustained, abnormally low interest rates, higher unemployment and an ongoing and likely quite slow economic recovery. And this is all the more challenging against a Covid-19 backdrop, where this year we have begun to see changes in how people are accessing their pensions. Data this week showed a big increase in the number of pots being accessed in August and September compared to March and April. The number of people withdrawing their pension in one lump sum has almost doubled in that period, although it’s important to stress it’s still not at the level of this time last year.

So to make sure the pension freedoms stand the test of time, we need action now. We think this should focus on three core areas.

• Firstly, we need a fundamental rethink of how financial advice and guidance operates:

We still see far too many people making complex and vital retirement decisions without any help at all. 

The advice market simply does not reach the majority of customers. Indeed, consumer polling published by the ABI today found that 72% of respondents would not pay for any form of advice either digitally or face to face.

We also need to look at how firms are regulated and how automated advice can be enabled. The FCA’s work on Consumer Investments and the Financial Advice Market Review provide a great opportunity to potentially make these reforms and enable advice that is simpler, more accessible and it is fit for the future.

For those that do not seek advice, our polling shows that consumers have mixed views on how they want to receive financial guidance. So, there needs to be a range of options available to suit individual needs.

It is right to explore new ways to drive people to impartial guidance at an earlier age. And we are also supportive of DWP’s measures to increase the number of people receiving guidance when looking to withdraw from their pensions.  But, this alone will not be enough to address a situation where only 14% of people seek support from the excellent Pension Wise service.

Providers want to be able to say and do more to genuinely help their customers.

And therefore, it is vital that the Government and FCA act together to shift the boundary between guidance and advice.  There should be an independent review of the FCA Handbook, ensuring that our post-Brexit regime meets the needs of UK savers. We no longer need to rely on MiFID definitions of a personal recommendation, and ESMA’s interpretation of implicit advice and we should not.

• My Second point for the future is that customers need more support with withdrawal rates and decisions

The average rates at which people currently withdraw money from their pension risk those who do not have another source of income running out of money during their retirement – and this risk will rise more as people rely more on DC pots.

We know most of today’s customers still have DB pensions, and many will be deliberately drawing down until their DB pension or the State Pension starts. But Future cohorts won’t necessarily have that option.

So, advice and guidance has a role to play here, but so do providers. The ABI is working with today’s sponsor, Frontier Economics, on a project to better understand what support customers need to make withdrawal decisions, and what more providers could do to help them.

In an ideal world, everyone would receive advice on pension withdrawals, but failing that, we should explore if further guardrails are needed to prevent detriment. And, in my view, these can be applied by providers, rather than prescribed by regulators.

• Thirdly, we must do more collectively to prevent pension scams and investment fraud

Pension scams and investment fraud have grown in prominence this year, and the Work and Pensions Select Committee is right to look at it in more detail and I’m delighted that we’ll be hearing from the Chair of the Work and Pensions Select Committee Stephen Timms this afternoon.

We agree with the Pension Schemes Bill limiting the statutory right to transfer when ‘red flags’ are identified, it’s an important step. And we support the Pension Scams Industry Group’s work to help industry identify suspicious activity. ABI members are also committed to carrying out appropriate due diligence on transfers.

But further work is needed: we need a clampdown on firms on the fringes of regulation; we need to look past pension scams to investment fraud, especially taking action against those which are accessed online; and a tougher stance on unregulated investments.

Supporting people with decision making and protecting them against scammers are some of the core challenges for policymakers that will ultimately prevent poor outcomes and determine the success of pension freedoms. There’s just two other areas I want to touch on briefly; wider policy areas that we mustn’t forget.

• The first is the need to build on Auto Enrolment – we’d like to see the findings of the 2017 review of Automatic Enrolment implemented, and we welcome the Pensions Minister’s intention to bring forward legislation in this Parliament and tackle the problems of small pots – because we know that the benefits of Pension Freedoms are only meaningful if people have adequate savings to use flexibly in the first place.
• And we need a long-term settlement on social care funding – a clear offer from the State, that acts as a foundation for people to make their own provisions. As more and more people rely on DC pensions to provide their income in later life, our industry can provide part of the solution, alongside insurance products and property.

Conclusion

So, to conclude, we have made good progress over the last 5 years of Pension Freedoms – and today represents an opportunity to celebrate that, to reflect on the lessons learnt and the journey that we have travelled – but  the real focus must be on the challenges that still remain.

The pension freedoms have been hugely popular so far; but we won’t know their full impacts for many years, if not decades. So, it has been important this year to take a step back, to reflect on the successes and concerns and consider what next, not being unduly influenced by the last five years and making sure we understand the environment that lays ahead.

We must do everything we can now to ensure they are a success.

So today and this five-year anniversary marks a milestone, but not the end of our work. On the contrary, we need to make sure that we drive further reform and accelerate progress rather than take our foot off the pedal.

Everyone engaged in the work to maximise the impact of the Pensions Freedoms can expect to see more from us at the ABI and the sector, and we hope to see more from you all too, as we continue to make sure this is a  collaborative effort by everyone with a stake in ensuring everyone in the UK has what they need to live a healthy and prosperous retirement. Thanks for your time and attention.

 

Read our Five years on: future-proofing the freedoms here.