My Lords, decumulation is the process of converting pension savings into retirement income. I hope that, as we deliberate in Committee, we will try to avoid as much jargon on pensions as we possibly can to make it understandable not only to ourselves but to the public outside.
Our new clause on decumulation is aimed at protecting savers who default into an annuity with their same savings provider. At the start of Committee stage it is important to note that we are in a pretty dramatic and fast-changing environment for pensions. We must not forget those parts of the pensions market that are not currently working for consumers as well as they should. The amendment would provide safeguards for those who do not take advantage of the new flexibilities provided by the 2014 Budget changes, and for whom an annuity remains the best product. This may be the case for some who feel that they would still prefer the security of a product that guarantees them a set income for their entire lives, without the difficulty of making predictions about life expectancy. That can still be a very attractive option.
The ABI code of conduct requires members to encourage savers to use the open market option when choosing an annuity. However, 50% of savers still buy an annuity from the company they have already saved with. This situation could be further exacerbated by auto-enrolment, under which the majority will be enrolled by inertia. We know that, as a result of not shopping around, many get a much worse deal than they could have had, so this could have a serious effect on the size of their annuity. The National Association of Pension Funds estimates that those who do not shop around get up to 20% less in their annuity. The Financial Conduct Authority estimates that consumers could be missing out on up to £230 million in additional pension savings because they are not shopping around in the most effective way.
We know that this market has not served consumers well in recent years, and the process remains complex. The Financial Services Consumer Panel recognised this in December 2013, and said that a “‘good’ annuity outcome” might well require expert help. Our new clause would require the recommendation of an independent broker to sell an annuity to someone who has saved with the same scheme. This would protect consumers from getting a bad deal when taking a crucial decision in their lives. As was made clear in Committee in the other place, pension schemes should ensure that any brokerage service they employ on behalf of their members meets best practice in terms of providing members with an assisted pathway through the annuity process, ensuring access to most annuity providers and minimising the costs. Pension schemes have a duty to get the best possible deal for their members, or to do it themselves in-house. Such good practice can be found in pension schemes such as the Royal Mail and the National Employment Savings Trust.
That view flows partly from the significant evidence that the best way to get value for money on an annuity is to “bulk-buy” that annuity on behalf of the cohort of scheme members who are going to retire. For example, let us look further at the National Employment Savings Trust, which requires annuity providers to make sealed bids to provide annuities for those who have saved with NEST. It takes the cohort coming up to retirement and says to the providers, “We have X people. Given their personal circumstances, and taken together collectively, what offer of an annuity will you make?” This seems a sensible way to proceed. It has the advantage of scale, and the expertise of the same pension scheme that built up the pension pot is used to turn it into a retirement income.
This is a brief opening amendment in the form of a new clause, so I shall summarise the position now. Annuities as they are currently constituted have not been delivering value for money for the whole of the market. The fundamental reason is that half of those coming to the point of annuitisation—turning their pension pot into an income—do not shop around for the best deal because it can be a complex, confusing and difficult process. Because of that and because of the advantages of bulk-buying by a professional expert, it seems sensible, for the consumer to get it right for their retirement income, to empower pension schemes to undertake that responsibility. As the new clause draws on best practice, I hope that the Government will see its merits. I beg to move.