Welcome to this afternoon’s session. We will hear, first, oral evidence from the head of savings, retirement and social care at the Association of British Insurers, and from the National Association of Pension Funds. Unfortunately, I understand that Dr Debbie Harrison from Cass Business School is unwell and not able to attend. For this session, we have until 3 pm. A Division in the House is likely some time this afternoon. When that happens, I will suspend the Committee for a quarter of an hour. I am afraid we will just have to take that when it happens.
Witnesses, could you introduce yourselves for the record, please?
Good afternoon. Let me begin with the larger part of this Bill, which is around collective defined contribution. What is the major flaw of individual defined contribution, and if that is your view, which collective defined contribution might or does have the ability to remedy?
Dr Yvonne Braun: We welcome the fact that there will be a middle space between defined benefit, which employers are increasingly unwilling to offer, and defined contribution, where the investment risk sits with the investor. Making that space more prominent is going to be positive, because there are quite a lot of middle-way alternatives that are already possible, such as cash balance schemes and schemes with a life expectancy adjustment factor.
However, we think that there are quite a lot of questions that still need to be answered about collective DC in particular, because the legislation is highly general and a lot is left to regulations. I will just give you an example. Where you have a target, it is unclear how the target will be set, it is unclear what the probability of the target will be and it is also unclear how the target will be communicated to pension scheme members. That makes for potentially quite a complex situation. It also makes it quite difficult to predict what the potential update of collective DC schemes might be.
Joanne Segars: I certainly agree with the ABI that populating that space that sits between pure DB and pure DC is a very useful exercise. It is something that we at the NAPF have supported for a number of years. Ensuring that there is something that gives individual members greater certainty about the outcome of their pension is extremely useful. In considering some of the risk-sharing metrics of defined benefit, we were disappointed that we did not see something that was more of a DB-lite approach being taken. I agree with the ABI that some of the ways in which that then gets communicated to members can be rather complex, so it takes an awful lot of explanation when it comes to describing it to members.
One of our fundamental issues at the moment with the wider debate around risk sharing is whether there is currently sufficient demand for risk-sharing options and solutions among employers and scheme sponsors.
Yvonne, you elaborated to some extent on your earlier answer. Obviously, this Bill is permissive rather than prescriptive. Do you have an opinion on where you think the collective model will end up in terms of design? Will it be closer to DB-lite or to individual DC-heavy, to coin phrase? Will it be about risk sharing within a generation—the pooling of asset, risk and reward—or do you think there is an appetite for intergenerational collective DCs?
Dr Yvonne Braun: That is quite hard to predict at this point. I was quite struck by what the Government Actuary’s Department said on collective DCs in its report. The conclusion was that its modelling results on average for collective DCs enhanced performance and increased predictability of outcomes, which is the holy grail of pensions, but it also said it had significant doubt about the ability to manage risk in a way that is fair to different generations of scheme members and it had doubt about whether you would have stability in collective DCs in terms of its dependency on a new stream of members.
I suppose I am saying there are still quite a lot of conceptual and detailed questions that need to be worked through, and only then will we know whether employers, the ABI’s members and NAPF members will have an interest in going that way and offering it. Then there is of course regulation and how it works from a prudential perspective and so on. It is a long rat’s tail of detail, which we will need to work through and we will no doubt do that.
Joanne Segars: I certainly agree. At this stage it is rather too early to say which end of that defined ambition spectrum some of this might fall out. There is potential for both ends, but at the moment we need a lot more clarity around defining defined ambition, and we also need to work through what employer appetite is for this because that will drive some of the outcomes, but also some of the consumer appetite for this, because again that will drive some of the outcomes. At the moment it is too early to say because everyone’s mind is focused elsewhere.
Thank you. Let me take up the guidance issue, which has dominated the witness sessions so far and played a significant role. The evidence so far strikes everyone in the Committee—there is real concern in the pensions world about the lack of clarity in what guidance will amount to, and the role of the FCA, the Treasury and the Department for Work and Pensions in ensuring appropriate safeguards, checks and balances in the system. Would you like to comment on where you think there is room for improvement in the guidance?
Joanne Segars: We absolutely share the concerns, which have come out quite strongly already from the evidence sessions. We have about 150 days to go until 6 April and there is a huge amount of information that we simply don’t know and we need to be in place sooner rather than later for trustees and scheme sponsors to make the freedom of choice agenda a success and to make the guidance guarantee a success. We have a list of 101 known unknowns, to coin a phrase, of issues that need to be clarified, and clarified quickly, for the guidance guarantee to be implemented.
Joanne Segars: But of course the issue for schemes, and providers too, is that they need sufficient lead-in time to be able to implement these changes well. Already, schemes are sending out wake-up packs; already schemes are getting questions from their scheme members about these issues. Schemes really need clarity, and they need that clarity quickly.
Joanne Segars: We are seeing some clarity. Already this week, we have seen some clarity about who the providers will be, so we were able to tick that off our list, but we need to see now some more detailed clarity on issues, in particular around disclosure requirements; the branding and presentation of the guidance guarantee; what the guidance guarantee will offer; what the schemes and providers will need to offer on top; issues around defined benefit to defined contribution transfers; again, what information schemes need to be satisfied, which they need to see; and, again, helping scheme members who find it very difficult to make a choice, or who are unwilling to make a choice. So there are quite a lot off issues: they are our top four group of priorities for Government to look at.
The thing I suppose that I would just like to clarify is, there are 101 questions but have you made 101 suggestions? Have you offered solutions as to what you think would work best for the schemes? That is the most important thing: the positive contribution. Any of us can sit and ask the questions, but what the Government really need is strong input about what you think is most important and how it should come out.
So when we get the submission of this 101 we will see what the proposed solutions are as well, will we? Transfers, for example, is a classic example. Schemes have been dealing with defined benefit/defined contribution issues and transfers for donkey’s years, so they must surely have an idea of what information should be in there, what questions should be asked and so on.
Joanne Segars: I think we have ideas about what information should be asked for, and the questions we need to know, but again we need to know what information the regulators will want to see, because this will potentially open up the issue to a much bigger scale—just taking this issue. [Interruption.] So it is about what information the regulators will expect to see.
The thing that surprises me is that you referred earlier to our needing to define “defined ambition” better, and to understand the demand, but the National Association of Pension Funds is precisely the body that should be helping to define it, and it has been out there now for the last two or three months. In terms of understanding demand, your members are the people who, potentially, are going to be interested, so have you asked them what the demand is?
Joanne Segars: I think you might get different answers from different firms, from actuaries, but certainly when we speak to pension schemes their view is, “We might be interested in this over the longer term, but right here, right now, we are focused on the issues at hand.” Of course, the issues around freedom and choice are foremost—uppermost—in their minds, but there are a number of other changes that schemes are grappling with too.
You said that there was no demand for shared-risk schemes or collective schemes. Have you done some surveys among your membership to elicit that view? When you say no demand, do you mean absolutely no demand or little demand?
How do you interpret that? Do you interpret it as them waiting to see before they make a decision, or have they most definitely made the decision that this is something that they are not minded to be sympathetic to?
Joanne Segars: A number of schemes have made the decision that they have moved from defined benefit to defined contribution, and that is the journey that they are taking, so they are looking at issues around their DC offer and taking account of the additional work that has gone on around strengthening DC. We saw some further information about that at the end of last week, which we very much support. I think schemes are focused on their DC offer at the moment. Over the longer term, schemes may be interested in this, but at the moment their answer is, “This is not for us right now.”
Dr Yvonne Braun: Our members would be product offerers, rather than employers setting out these schemes. To be honest, they are just too focused on everything else that is going on. Quite frankly, with automatic enrolment and thousands of employees to enrol, and with making the Budget reforms work and making them a success, they have got their hands more than full.
I think you ought to, because what you said today pretty well directly contradicts what the ACA said yesterday or the day before. I do think that there needs to be a dialogue. I do not know how many of your members respond to your surveys or questionnaires, but we are getting conflicting evidence on that point. I just note that at this stage; we can come back to it later.
Pension providers will have a statutory duty to direct individuals to the guidance service. How do you interpret that duty? What do you think it will entail for the providers?
Dr Yvonne Braun: What is really important is that we have very powerful encouragement to customers to take up the guidance. We are working with the Treasury to make sure that we have an effective letter that makes clear the benefits of the guidance. That will, if you like, take the place of, or be in addition to, a lot of the information that providers send at the moment when customers are coming up to retirement at age 65. Indeed, if customers contact the pension provider about wanting to take benefits, they would get that letter as well.
I think the questions are: what is the branding? Where will people actually go? What is the website? What is the telephone number? What is the content? To echo Joanne’s point, these are some of the things on which we need clarity quite urgently, because the seamless integration of what providers do, how they refer people to their guidance guarantee, and how that works together, is really critical to the success of the reforms.
Can I ask about this balance between giving people information overload and keeping it short, sharp and punchy? Where are you in terms of deciding between those two and where on the spectrum you will fall?
Joanne Segars: It is a very tricky issue, and I know it is one that Committees and Select Committees have discussed in the past. Part of the answer lies in knowing what the guidance guarantee itself will offer, because the guidance guarantee needs to equip people to make sensible decisions, or at least narrow down some of their options. There is the question of whether that means that people will go and get further advice, regulated advice. That may be appropriate for some people. Many others may just say, “I’m afraid I’m simply not prepared to pay for that regulated advice.” Certainly our survey evidence shows that people do appear reluctant to pay for regulated advice.
I think the first point is knowing what the guidance guarantee itself will offer, and what there will be in that 30-minute—or however long it will be—session that you have face to face, over the phone or via the website. Then, providers and schemes will be in a better position to know—they are well placed, particularly schemes, which know their members best and the circumstances of their own scheme best—what the additional information is, and what the gap is that they will need to fill. At the moment, schemes do not really know the size of the gap that they will be required to fill, although making sure that people have enough information but are not overloaded is a very delicate balancing act.
But we do know, as you have mentioned, that the take-up of regulated advice, if it costs money, is likely to be very low. We do know that there is no regulated advice at a cheap rate. We have not solved that problem with regulated advice, so how pessimistic are you that people will not take adequate guidance and advice to make a proper decision?
Joanne Segars: Yes. We need to make the point that there needs to be a big campaign. We need to make sure that people are aware of the service. There is a good pedigree here. The “I’m in” adverts were enormously effective, so there is some good pedigree; there is a good basis from which to build. Making sure that people know and use the service and go into it is half the battle. We then need to make sure that people come out of that guidance guarantee half-hour and are equipped to make some decisions. For some people, it might be a fairly straightforward case of, “I’m afraid your pot is quite small, so the most sensible thing for you to do, bearing in mind your other financial needs, is just take the cash.” Then it is a question of making sure that people do, if it is appropriate for them, go on and take that advice. I rather share your concern that we have not quite cracked the question about who will provide that advice to people who do not have very large pension funds—very large pots—but who none the less could benefit from that advice, because that part of the market does not seem to be terribly well served at the moment.
Dr Yvonne Braun: I would just add that when the Treasury originally consulted on freedom and choice in pensions, we submitted a report that we put together with our members and with KPMG, setting out what we felt should be the scope of the guidance and what it should cover. As Joanne says, it is really important that people are made aware of the key things they need to think about. That is not just what type of retirement product they might wish to consider. It involves much more fundamental questions around whether it still makes sense to work, the person’s debt situation, whether they have a financial dependant, what their health situation is and so on. I would be very happy to send that report to the Committee, if it would find it useful. I just want to make the point that we do try, in the industry, to help Government to take some of the decisions, and to inform some of their decisions and come up with our own ideas. We do not just say there are 101 problems; we try to support Government in their work.
Has either of your organisations considered a second line of defence? It was put to us yesterday that when someone comes to take their pot out, a question should be asked as to whether they have received guidance or advice or both. Do you think that that would be a sensible inclusion, and have you discussed it among your organisations?
Dr Yvonne Braun: We have discussed it with our members. What we are a little concerned about is that, understandably, the rules that the FCA consulted on were, let us say, relatively narrowly drawn. That is understandable, because it did not have much time, and so on and so forth. We are quite clear that all providers of financial services in this retirement income space should make sure that they ask their potential customers a series of important questions, such as the ones I have just mentioned. We have set this out in the ABI’s code on retirement choices as an obligation on all our members to ask customers, as I said, about financial dependants in particular, health, inflation risk and so on.
We would like to see the FCA make clear its expectation that all providers of retirement income products from next April will ask customers the same questions and make sure that customers are aware of the same risks. It is not clear whether everybody is going to take up the guidance, so there needs to be some sort of second line of defence—guard rails, back-stops, or whatever you want to call them.
Joanne Segars: Clearly, trustees are not in the position of giving regulated financial advice, but they will want to reassure themselves that their members have been through the guidance guarantee, and that they have been through that process before the money gets transferred out. Obviously, if it is a DB or DC transfer, they have to be satisfied that regulated financial advice has been taken.
Picking up on a point you made a second ago, are you entirely satisfied that the FCA is on top of what its guidance role is? It is not regulated as such, but it will clearly be crucial. Is it taking a positive line of ensuring that the guidance matches the requirement, or is it saying, “This isn’t regulated, so it really doesn’t involve us”? Clearly, from all that you have said so far, we need the FCA to take a real interest in what guidance is delivered.
Dr Yvonne Braun: And I think it is. The FCA has to an extent sidestepped the problem—whether it is advice or not advice—by basically setting up an entirely separate guidance regime, which I think is entirely sensible. I think it will be responsible for supervising the standards. It has been given the powers in the Bill, so I think it will take an interest, and I think it takes it very seriously.
Joanne Segars: I agree with that. There is no doubt that the FCA is taking this very seriously indeed. Like the rest of us, it is trying to work to a very short timetable to implement this. We are sort of working together to find the right solutions, but there is no doubt the FCA is taking this very seriously. One of the issues we have is that for trust-based schemes the FCA is not the regulator. The Pensions Regulator is, so we again need to see many of these powers replicated by the Pensions Regulator.
Defaults have come up several times. What happens to the people who do nothing and whose money just sits there? One of our witnesses this morning presented a nightmare scenario in which people’s money is in cash, earning next to nothing, and by the time you have knocked the charges off, the actual value is going down. Do you feel that more needs to be done to legislate or regulate for defaults, or are you content that scheme members will get a good outcome with no further action?
Joanne Segars: We do need to open up the debate about defaults. There may be people who simply decide that they do not want to make a decision, or who cannot make a decision, even once they have been through the guidance guarantee. Particularly in the early days, we might expect individuals to be quite bewildered by the choices that face them, so we do need to open up the debate on defaults. It is an issue that we are actively thinking about at the moment. I cannot say that we have the answers at this moment in time, but it is something that we are turning our minds to, because it is an issue that we will need to think about.
Dr Yvonne Braun: I agree. I think the defaults question needs to be thought about for the new environment. In practice, if a provider—one of my members—contacts a customer at the six-month or six-week stage and cannot get any response, and it is the right address and everything else because they traced it, they will leave it invested, because they have not got the power to do anything else. If they took a unilateral view that it would be better for that purse to sit in UK equities, and then the market went south, they would not be thanked for it. So they are acting in accordance with the contract, which is typically, as you say, Minister, lifestyling, where people sit in less volatile assets—not just in cash, but typically in government bonds and corporate bonds also. They could not really do anything different. They defer that customer and try to do the process again three years down the line. It underlines the crucial importance of our engendering a culture in which people are more engaged with their retirement savings in general from a much, much earlier age.
Perhaps I can follow that up. It was honest of you to say that you did not have answers, but perhaps I can ask you something that you will know. At the moment, where people do nothing, can you describe to us in your two different sectors what happens to people’s money? In particular, do you think that schemes or providers will act differently post-April 2015 because of the freedoms? What happens now, and how do you think it will change?
Joanne Segars: That is something we are discussing with schemes right now. The answer may be different for different schemes, frankly. Particularly, some of the larger master trusts might take a rather different approach to single employer schemes in our sector. Again, that is not terribly helpful, because it is not an answer, but schemes are genuinely thinking this through and, as I say, the answer might be different for different schemes. I am very happy to share further thoughts when we do have answers, because as you say it will be absolutely crucial. In a sense, we just do not know the potential scale that we might be talking about here, but we feel that it could be a significant number and therefore we need to think about it.
Of course, schemes are also thinking about what their default investment strategies are right now anyway. Previously, they have been targeting lifestyling, but in future that may not be right. If people want to take their money and draw down, then lifestyling may not be right. All these things are bound up with each other, which is why it is not a straightforward answer.
Dr Yvonne Braun: What happens if a customer does not make a decision? It is as I described earlier. Nothing happens. In effect, the customer’s pot gets deferred and, a few years down the line, the provider makes another attempt at waking them up—contacting them to see whether there is a decision. I agree, a broader default debate needs to be had, but in the context of that we also need to think about what powers providers actually have, because the contract is a contract and you cannot unilaterally override that—you need a statutory override for that, of some kind—and they simply cannot do that.
I was shocked, though encouraged, Yvonne, when you said that the ABI wanted more regulation. I think what you said was that your members want additional regulation, in terms of when they provide an apt retirement product, they have to ask all these questions or whatever it was. Will you just repeat that, if that is a fair statement? The ABI is asking the Government to regulate to require its members to ensure that they are not mis-selling products.
Dr Yvonne Braun: We are not necessarily asking the Government. This is probably a matter that can be dealt quite well by the FCA. We are asking the FCA to make its expectations clear that, from next April, providers of retirement income products make customers aware—those customers who have not taken the guidance especially—of a number of risks that they need to be aware of before they buy a product. That is entirely consistent with what is in our retirement choices code, where precisely these sorts of risks have to be highlighted in sales conversations that our members have with customers at this point, such as, “You are married. Do you really want to buy a single-life annuity, and”—well, this is in the old world, where lots more people bought annuities—“Are you really sure that is the right way to go?”
The issue of how one safeguards in the guidance space, and then in the sale of products, is key. Do either of our witnesses see a role emerging for products that ensure against longevity risk? Is that something that will emerge on the landscape? More widely, should there be a requirement for products to include a regular review of changes in circumstances and, in particular, of when the optimum moment for moving to an annuity occurs? A simple way to put that set of questions is: how do we envisage that space being filled, in terms of the sale of products?
Joanne Segars: I suppose that one might say that we have products that insure against longevity risk; they are called annuities. We have a long way to go still to reform the annuities market and make sure that the review that the Financial Conduct Authority started earlier this year is expedited. Once people have been through the guidance guarantee service and considered their needs, a number say, “Well, actually, I do want an annuity, because it provides me with a regular income and insures against me living too long.” Certainly that is the case when we undertake survey evidence. Our last survey suggested that 82% of the public want retirement products that give them a regular income for the rest of their lives and ensure that they do not outlive their cash. We are losing sight in this debate of the need to make sure that the annuities market works well, and works in the interests of consumers, not providers. We want to highlight that and make sure that the FCA’s feet are kept to the fire on that particular point.
You are right that we are likely to see a whole range of new products, many of which we have not yet thought of, enter the market. There will need to be some really quite strong regulation and oversight of those new products so that we do not have a mis-selling free-for-all, particularly in the early days when the market and consumers are perhaps finding their feet, so that we can make sure that people get good-value products and are not, frankly, ripped off or bamboozled by some of the products that we might see entering the market.
Would you elaborate on the FCA’s role in this area? You mentioned its review of annuities; do we have any idea of when that never-ending story will be completed and there might be some action?
There are a numbering of fascinating issues here. On the NAPF side, Joanne, there is the business about what happens at the moment—that was the question Steve Webb was asking. I was a bit surprised, because the bottom-line answer seemed to be, “Well, we don’t really know. Different things happen to different people.” That has to be true, but it must be possible through your members to have a better analysis of what happens now, and therefore what might be different in the future. I am sure that that would be useful to all of us who are grappling with the Bill.
On the ABI side and the pot that is deferred, Yvonne, you referred to needing a statutory override. Again, I am not quite clear about that. If people are in default at the end of their working life, that will tend to be, as you rightly suggested, in assets that are “low-risk”. Presumably there is no reason why those assets should not remain in the same investments. I suppose the question is: some time before that moment, do you need to send a letter to them that simply says, “You have some important decisions to make. We are going to make sure that you are put in touch with the right people to give you guidance. If, by such-and-such a date, you have not decided what you want to do, we will keep the assets in your pension pot as they are, unless you wish us to do something different.”? Surely that is an adequate way of handling the problem.
Dr Yvonne Braun: Indeed it is. The point I was trying to make was that somebody might take the view that it is in the interests of the customer to do something different. I was trying to say that that is not a freedom that providers have, because they are bound by the terms of the contract. That is why you would need something to allow you to override that.
But there is the question, rightly referred to earlier, of the danger that they will all be shoved into cash, so that, net of fees, let alone taking into account any inflation, the customer will be losing money month by month. What percentage of customer assets do you guesstimate to be purely in cash at the moment of retirement? I presume that there is a mixture of fixed-income and other instruments in there.
And then in terms of the opportunity both for providers and for individuals—the pensioners—what discussions have happened with members perhaps to create a marginally different type of offering that could be available to people who do not want to make a decision now, but for whom some growth would actually be quite useful? The letter could have a variation that says that if you are looking for a higher-growth option, this is one you may want to consider—tick here if that is what you want. Are there not those sorts of opportunities as well?
I was just trying to cater for inertia, which will be the greatest danger in all these things. Choice is fantastic, but there will be those who will not make a decision. Is that a discussion you have had with the regulator?