Pension Schemes Bill — House of Lords, 2015-01-12
Topic: Mixed Topics
Keith Bradley (Labour, Centre-left): My Lords, this amendment is on the specific issue of second line of defence. We have had some debate on this matter, including the excellent contribution from the noble Baroness, Lady Greengross, on her amendments. However, this amendment places a specific requirement on pension providers to make an active intervention to ensure that they help savers when accessing their DC pension pots to ensure that they get the advice or guidance they need, check that the products are appropriate for them, and have taken into account the tax implications, their partners, lifespan and other matters relevant to planning for their retirement. As we have heard, this has been called the second line of defence The need for it has been identified by the Financial Conduct Authority, which released two long-awaited reports—its thematic review of annuity sales practices and Retirement Income Market Study: Interim Report. The reports show continued failure in defined contribution pension providers’ treatment of existing customers, even after three separate investigations between 2006 and 2014. It is time for the FCA to take action before the "freedom and choice" reforms go live in April this year. The findings of the reports make unhappy reading. Perhaps my noble friends will not be surprised by this because we have been there before. It is worth summarising the key findings, which make the case for our amendment The thematic review updates the analysis in the FCA’s February 2014 report. Its key findings are, first, that, 60% of retirees, "were not switching providers when they bought an annuity, despite the fact that around 80% of these consumers could get a higher income on the open market" Secondly, an estimated 91% of people with medical conditions could get a higher income on the open market through an enhanced annuity. Thirdly, "firms’ sales practices are contributing to consumers not shopping around and switching … and missing out on a potentially higher income in retirement as a result" Lastly, the study found non-adherence by pension providers to the ABI code of practice. The FCA concludes that its findings clearly highlight that firms need to make improvements in relation to how consumers are informed about shopping around for enhanced annuities The key findings of the interim Retirement Income Market Study are that, "competition in the retirement income market is not working well for consumers … many consumers are missing out on a higher income by not shopping around for an annuity, and some do not purchase the best annuity for their circumstances" The FCA economic analysis shows that, "for people with average-sized pension pots, the right annuity purchased on the open market offers good value for money relative to alternative drawdown strategies" It also found that: "Consumers’ tendency to buy from their existing pension provider weakens", competition. The FCA’s consumer research confirms that, "pension savers display well-known biases, such as a tendency to under-estimate longevity, inflation and investment risk", which make them vulnerable to being sold products that do not best meet their best interests. This research also finds that the choices that savers make are highly sensitive to "framing", and how options are presented will affect decisions they make. The introduction of greater choice and potentially more complex products will, "reduce consumers’ confidence and appetite to shop around", and thus weaken the competitive pressure on providers to offer good value in this market What should be the remedies and next steps? The FCA is continuing to monitor the market and is expected to publish a final market study report in the first quarter of this year. It is also seeking views on five proposals it hopes to take forward in 2015. These are to: first, require providers to show how their quotes compare relative to other providers on the open market, including quote comparison; secondly, develop plain-English pensions guidance services and tools to support consumers’ decision-making; and thirdly, develop an alternative to the current pre-retirement "wake-up" packs sent by pension providers to their customers in the run-up to their stated retirement date. They are, "too long, difficult to navigate and full of jargon" Next, the FCA proposes in the longer term, to develop a "Pensions Dashboard" to, "enable consumers to view all of their lifetime … savings … (including the state pension entitlement) in one place" Finally, the FCA proposes to, "continue to monitor the market as it evolves using a combination of consumer research, market data and", ongoing regulatory supervision. This will need to monitor for the likelihood of "pensions liberation" and other scams targeting consumers at retirement We have in this Chamber on too many occasions examined how the FCA and other bodies are attempting to drag this financial sector kicking and screaming to act in the best interests of its savers rather than those of their shareholders. The two FCA reports are a further damning indictment of the industry. The FCA proposals, in my view and that of my noble friend Lord McAvoy, help to support the amendment but in themselves are not enough In Committee in the Commons, expert witnesses including Dr Ros Altmann, consumer advocates from Age UK and the Financial Services Consumer Panel, and ABI representatives all called for the FCA to introduce a second line of defence, as did other reputable bodies such as Just Retirement. We are persuaded that this is the right course of action. Our amendment will require pension providers to actively ask savers seeking to access their pension savings whether they have considered the most important risks. This could typically include whether their decisions will mean they increase their income tax, outlive assets or run out of money, miss out on guaranteed annuity rates from the existing company, provide benefits for a spouse or other persons on death, miss out on additional income resulting from medical conditions or lifestyle factors, protect savings and income from inflation, purchase an uncompetitive product, or pay an exit charge that could be avoided. All these are crucial matters that need to be properly regulated, and they are part of the amendment for our second line of defence. The FCA could incorporate this through the introduction of a conduct regulation or by issuing FCA conduct guidance for providers to specify their responsibility for actively raising the risks that I have just outlined If we do not take this opportunity to act on the evidence contained in these two FCA reports and require changes to be made, we will further undermine consumer confidence in the pensions financial sector and the principles upon which this series of pension reforms are based will be undermined. We will not encourage people to save for their old age; we will not achieve fairness across generations; and it will lead to increased cost to the taxpayer. For all these reasons I commend this amendment to the House.