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Future proofing the pensions freedoms

Five years on from their introduction, the pension freedoms have revolutionised the retirement landscape. The change has granted people far more choice in retirement, with over £30 billion being flexibly withdrawn since 2015.

However, people are navigating complex retirement decisions, often unsupported, and taking money out quickly.

In the most recent data, full withdrawals had increased to the highest level since the reforms, particularly among those age 55-64; and 40% of flexible income withdrawals were at an annual rate of 8% and over.

Current retirees are likely to rely on a mixture of Defined Benefit (DB) and Defined Contribution (DC) pensions. While they may not face problems by exhausting DC pots, in the future, more people will rely on DC pensions, often exclusively.

More safeguards and support are needed to future proof the freedoms, to prevent risks to consumers now and in the future. While further evidence is needed, some actions can be taken now:

  • Shift the boundary between advice and guidance.
  • Introduce a later-life review, a clear framework for the delivery of guidance and implement the lessons from trials of a nudge to guidance.
  • Strengthen the regulation of DB to DC transfers, and pension scams.
  • Explore ways to support customers to make sustainable withdrawals.
  • Improve provider communications to support those making decisions in retirement. 
  • The pension freedoms successfully made the market much more flexible. But it remains a young policy and it will be many years before we will truly be able to assess the impacts on people’s retirement outcomes. 
  • The industry, government, regulators and stakeholders all need to collaborate in the interest of today’s savers, to ensure the policy is still successful decades down the line.

The introduction of the pension freedoms in 2014/15 revolutionised the retirement landscape. People have far greater choice in how to shape their retirement finances, and the policy is working well for many. However, this greater flexibility entails more risks and means that people need more support and safeguards.

Five years on, it is important to take a step back and consider where the market is working well, and areas that could benefit from improvement. This is the first of two reports from the ABI in 2020 to mark these first five years. This report:

  • Looks back at the impact of pension freedoms, the benefits to consumers, and the risks.
  • Assesses how well those risks have been mitigated, and what problems are still present.
  • Sets out what more needs to be done.
  • Looks forward to problems that could emerge in the future and how to fill evidence gaps.

This includes an assessment of the many solutions put forward by stakeholders, and a set of actions that can be taken forward now by industry, regulators and the Government. Delivering these changes collaboratively will improve outcomes for future retirees.

In November, we will report back on our progress, update on new research and evidence, and consider further interventions that may be required as a result.

Supporting decision making

Providing clear and effective information, guidance and advice is key. People face behavioural biases, complex decisions and varying levels of financial capability when navigating the post-freedoms world.

There is more support available to customers now than in 2015. The establishment of the Money and Pensions Service (MaPS) is pivotal to helping decision-making and can build on the successes of its predecessors. The Financial Conduct Authority’s (FCA) changes to wake-up packs and risk warnings should help bring early engagement with simple messaging, and providers have invested heavily to improve communications with customers. Investment pathways will help people find the right investment strategies for their needs.

We propose:

  • Given that post Brexit, regulators have the freedom to adapt UK conduct rules, Government and regulators should shift the boundary between advice and guidance to achieve a step change in the support available to customers.
  • The Money and Pensions Service (MaPS) sets a clear framework for the delivery of guidance, develops a later-life review, and works with DWP and FCA on the implementation of the lessons from the current trials of a “nudge to guidance”.

Safeguarding consumers

Policy-makers have acted to prevent customer harm when accessing the benefits of flexibility, but should go further. Prompted partly by the FCA’s guidance, firms have a much stronger focus on vulnerable customers, who may struggle to make the most of the freedoms. The FCA’s new drawdown charge disclosure rules and a tool by MaPS to support shopping around on investment pathways have widespread industry support.

Many people have transferred out of DB schemes to access the flexibility of DC, but it is important they can do so safely. Following well-publicised failures, the FCA should continue to strengthen the supervision of advice firms, but DB schemes should also have to communicate the risks more clearly themselves.
At the most extreme end of detriment, concerns about pension scams have heightened. Government has enacted a ban on pensions cold-calling and raised awareness alongside the regulators, but a clampdown on firms on the fringes of regulation is needed.

Guidance is critical to helping customers understand the impact of tax, but closer attention to the effect of the Money Purchase Annual Allowance (MPAA) on pension savers is needed.

We propose:

  • DWP requires DB schemes to issue a letter at point of request for a DB to DC transfer with warnings of the risks.
  • FCA bans unregulated investments in pensions to prevent pension scams.
  • HM Treasury reviews the MPAA and its impact on consumers.

Consistency and certainty across pensions

Long-term savings policy is complex, and many wider policy areas impact retirement outcomes. Enhancing automatic enrolment could make pension freedoms more meaningful for more people. Savers also need certainty from the Government to help them plan, for example about future increases in Normal Minimum Pension Age (NMPA) and social care funding reform. A Retirement Commission could provide a holistic approach to tackling these issues.

More broadly, most people do not see the difference between trust-based and contract-based schemes; equivalent mechanisms are needed for occupational schemes to deliver the freedoms, including on wake-up packs, cost transparency, investment pathways and vulnerable customers.

We propose: 

  • HM Treasury legislates for its planned increase of the Normal Minimum Pensions Age to 57. 
  • Government establishes a Retirement Commission to advise on the policy changes needed for good consumer outcomes in later life.
  • DWP and TPR introduce equivalents to FCA rules for occupational schemes.

The industry’s commitments 

This is a young policy and its impacts will not become fully clear for many years. The market is still developing, and macro factors will shape its future, including pot sizes, interest rates, financial markets and the cost of a guarantee. Further research is needed in some areas: people’s wider financial circumstances, the interaction of pension freedoms and the labour market, and approaches to sustainable withdrawals.
But many of the actions in this report can be taken now, and we would like to initiate discussion across the sector about how to future proof this policy.

We propose to: 

  • Explore how approaches to sustainable withdrawal rates could be delivered.
  • Set out how providers can support those already in retirement through improved communications.
  • Work with relevant organisations to fill evidence gaps.

But many of the actions in this report can be taken now, and we would like to initiate discussion across the sector about how to future proof this policy.