Rachael Badger, Stuart Paton-Evans, Adrian Boulding, Dr Yvonne Braun and Jon Allen gave evidence.

We have until 10.45 am, so a bit longer, for these witnesses. Could you please introduce yourselves for the record?

Rachael Badger: Rachel Badger, head of policy research at Citizens Advice.

Stuart Paton-Evans: Stuart Paton-Evans, retirement propositions director at Scottish Widows.

Adrian Boulding: Adrian Boulding. I am the pensions strategy director at Legal & General.

Dr Yvonne Braun: I am Yvonne Braun, head of savings, retirement and social care at the Association of British Insurers.

Jon Allen: I am Jon Allen. I am a policy adviser on tax and pensions at the ABI.

Q 16

Thanks to everyone for coming along. We look forward to hearing what you have to say.

My first question is fairly general. Could each of you say briefly what you see as the main risks, but also the potential benefits, of the proposals? In doing that, could you refer to the suggestion that providers should give people some kind of pensions passport flagging up the need to take up the guidance guarantee so that they have some initial information about their pensions arrangements? Could you also talk about the so-called second line of defence?

Dr Yvonne Braun: From the perspective of the ABI, one of the principal benefits of the reforms is that they will allow people to feel a much greater sense of ownership of their pension pot, and we think that is very positive, because it will encourage people to save more, which will, ultimately, be important for society. That is one of the critical benefits of the Bill.

The risk we see is not so much the reforms as the way they have been described in the media more recently, which is very much about, “It’s cash at 55. It’s a bonanza. Woo hoo!” That is a concern, because it has the potential fatally to undermine what the Government are trying to do more generally, which is to encourage longer working lives and to make society more financially resilient. But that, I think, is not an issue with the reforms; it is more an issue of how they are described and what the emphasis in them is.

Turning to the questions about the pension passport and signposting, we agree that is absolutely critical. I notice that Teresa Fritz and David Geale pointed out how important that is. We are working closely with officials in the Treasury to make sure that what customers receive from providers points them very strongly to the guidance and to the fact that it is free and that it will help them think about the options they have. In many ways, that is the first line of defence—getting people to the guidance guarantee in the first place. If providers do not do that, which is, of course, still possible, we feel there needs to be a quite clear statement of expectations from the FCA as to what providers should then do. Some of the ideas from the ABI’s retirement choices code come in there. Where people are married, you say to them, for example, “Are you sure you want to take a single life annuity?”

The second part of the question concerns the pension passport. Already in the retirement choices code, our members are required to give the key information about the pension pot to their customers. I think there is room there for greater standardisation so that everybody gets the same type of document; it looks the same whichever  provider they get it from. That would be the piece underneath or at the same time together with the signposting to the guidance.

Adrian Boulding: There are two particular risks here. The first is that some consumers will spend their money too quickly and will run out. The second risk, which is the converse of that, is that some consumers will spend their money too slowly and find that there is a lot left at the end and they could have enjoyed rather more during their retirement. Those risks are offset by the benefits, which are that consumers have much greater flexibility in terms of the timing of when they consume their retirement pot and can adjust that timing to suit whatever lifestyle they want at a particular stage in retirement.

In terms of the guidance guarantee, we will make strenuous efforts to signpost that to consumers, to encourage them to take it up. We are particularly worried that there will be a low level of take-up of the guidance guarantee. We formed that worry having undertaken a pilot on a similar guidance exercise a year ago, before the Chancellor announced his reforms. In the survey work we did before beginning the guidance process, we found that 90% of consumers said that they would be likely to take up an offer of guidance.

At the point of their retirement we offered them a choice of three forms of guidance: one was TPAS, one was an independent financial adviser specialising in the at-retirement phase, and the third was a Legal & General sales adviser. Disappointingly, only 3% of consumers took up the offer of guidance. We will push it strenuously and encourage consumers to take it, but I warn you that you may see surprisingly low levels of take-up of the guidance guarantee.

Stuart Paton-Evans: One challenge in UK society at the moment is that people are just not saving enough for their retirement, particularly for the retirement that they expect to have. One of the constraints of that is the lack of flexibility that they have currently. As a result of the Bill the increased flexibility would remove one of those constraints to additional saving. We believe that that is going to encourage more people to save, so that can only be a good outcome.

A key challenge we see is how the industry, the Government, regulators and consumer groups can work closely together to ensure that customers have the right information that they need, given that the responsibility of their choices going forward is on them to make informed decisions and fundamentally achieve the best outcomes. The pension passport is a key component of that. We will also point people, within our processes, to the guaranteed guidance process, ensuring everybody is aware of it and gets the option to take it.

Rachael Badger: We at Citizens Advice welcome the Bill and the policy changes, because they put people in control and give them more choice. Our expertise is in helping people to make sense of their choices. That is what we have been doing for 75 years and we are confident we can help with that.

In terms of risk, from an operational point of view, as a service it is hard to gauge who will want to seek guidance on their options. As Adrian said, that feels like an unknown quantity. That is why we are working closely at the moment with the Treasury on the service design.

Jon Allen: I would add one specific point that builds on what others have said. The emphasis in some parts of the press on taking cash early, on the lines of, “This is a bank account; take your cash,” does pose risks, as we have heard, not only for people’s retirement planning but the specific risk that it is not like taking money out of a bank account. It is taxed money and there are tax traps that people will trip over. If they take a large amount of money out of their pot, they could find themselves charged at higher rate tax having never paid higher rate tax in their life before. This comes back to the whole question of guidance and advice, but people are dealing with a real risk, perhaps without realising, with something that is taxed income.

Cathy Jamieson has one more question, but could I politely request, because there are five witnesses, that we try to keep answers tight and although not necessarily short, just concise, so we can get through all five witnesses for each question?

Q 17

This is really a follow-up to the point that Jon just made. Do you agree that because of the way some of the reforms have been described in the press, some people’s expectations are going to be dashed if they believe they will have this huge pension pot but then do not have? And, given that we are talking about the pensions taxation Bill here, rather than the broader changes to pension schemes, has there been enough focus on the taxation implications and has that been considered enough in the discussion about putting the guidance guarantee in place?

Jon Allen: I think there is a danger here. In terms of the guidance guarantee, even if people do take that up, tax advice can only be pretty general. It cannot get into your specific circumstances—x, y and z—without teetering into the regulated advice side. That is a worry and inevitably, these reforms will be getting into territory that, I think it is fair to say, in the past was usually the province of people with more sophisticated financial knowledge. It comes back to the need for focus, again, on the guidance and where that flips into regulated advice, and yes, tax has to feature in there.

Dr Yvonne Braun: One thing I would add is that this is actually explicitly flagged in the FCA consultation paper, so we should expect a rule that says to providers that they have to flag the consequences of taking the entire pot as well. In broad terms, as Jon says, it cannot be specific to people’s circumstances, but that would probably be in the FCA rules.

Adrian Boulding: We think we can help consumers here. We will have a number of consumers who want to cash in their whole pension pot, and we think we can help them with a staged cash-out plan that will enable them to cash it out over two, three or four years in such a way that they stay underneath whatever tax threshold they stay comfortable with. Some will be comfortable staying at 20% and avoiding the higher rate tax that Jon mentioned. Others with less funds will be more comfortable staying underneath the personal allowance and avoiding paying any tax at all. We will have cash-out plans that enable consumers to cash their entire pension pot—not on one day, but staged over a small number of years to avoid those tax consequences.

Stuart Paton-Evans: Our research is showing us that awareness is still very low on a number of issues, in terms of general consumers, particularly about the impacts of longevity, inflation and tax. That is why it is absolutely key that we are able to provide consumers with as much information as we can at every single stage, so that they can make an informed decision. In terms of our research on the new flexibilities, we are seeing that 23% of consumers think that they may bring a decision forward. A lot of that may well be about releasing some money early, but 30% are now going to defer their decision and move into some form of phased retirement, so it is creating options for consumers. We need to be very clear on what the implications of those decisions are for them and make that clear to them, and particularly tax, for example, is a key aspect of those decisions that consumers need to take, as has been stated.

Rachael Badger: I agree that tax is a key consideration, but from our point of view, it is just one part of the set of complex choices that people have to make, which will include other considerations such as state benefits, their social care needs in the future, savings, debt and so on. From our point of view, the guidance is about a safe, supportive place to start to engage with these issues.

Q 18

I must declare an interest. I used to work for “the Widow”, Mr Paton-Evans—Scottish Widows. It is many years ago now; they found me out.

I have a straightforward opening question. Do you believe the annuities market is either broken or not functioning properly at the moment?

Stuart Paton-Evans: I think that annuities still have an extremely important place to play in consumers’ retirement planning. An annuity provides a guaranteed income, and the certainty that it will continue to pay for as long as they live. Our research tells us that consumers still want to have a level of income provided throughout their retirement, regardless of how they choose to manage or phase their retirement now. So annuities still have a fundamentally important part to play. We have seen sales fall as a result of the changes, but we still expect to provide annuities as a viable, important insurance contract for consumers going forward.

Adrian Boulding: I think I would echo what Stuart said, and perhaps go a little further. The impact on the annuities market has been dramatic. Our sales this year are at 39% of the level that they were at before the Chancellor announced his reform. Forecasting, we think that next year, when the reforms are fully in, our annuity sales will be at just 15% of the level they were at before the Budget.

However, we will still be providing them. We believe that they provide good value for customers and where a customer wants to take a fixed income guaranteed for their life, we will have a good-value annuity available for them to purchase.

Dr Yvonne Braun: It is worth saying that the annuity market has suffered quite a lot from quantitative easing and from ever-increasing longevity, and that has made quite a difference to the rates, if you compare the rates that are on offer today to those on offer 15 years ago. Beyond that, to answer your question directly the annuity market did not work for a segment of customers. It worked very well for a lot of other customers. Indeed, it also worked well for a lot of other customers who  stayed with their existing providers, because in many cases they can get guaranteed annuity rates, and these days you would never be able to get that sort of rate.

However, we have made a lot of efforts to try to get more people to switch, and to get more people to shop around. We have been successful in some ways. We have had more people being aware of the option to shop around, and the importance of it, and also more people buying joint annuities. We will publish that research quite soon, in terms of people’s understanding, awareness and behaviour.

What we have not seen so much of, even though we also wanted to see it, was more people switching, but with switching to a new provider you get into some quite fundamental issues about people’s engagement more generally. So, the reason why people do not switch annuities is highly correlated to whether they shop around for other general insurance products, for example; whether they have a pot that is smaller than £10,000; and whether they use the internet. These are some challenges, which we will still have in the new environment. We will still have quite an effort to make collectively, I think, to get to more engagement with savings generally and with these kinds of decisions.

Jon Allen: I have nothing to add to that.

Q 19

I ask the question because, if there are problems in the annuity market, I want to know the “segment” you were talking about there, Dr Braun; you said that annuities did not perform for a certain “segment of customers”. If there were problems in the market, they have been there for a number of years. I am specifically thinking about a group of customers who were convinced to buy annuities with profits, which has now meant that their pension pot is down to zero in some cases, and that is a serious scandal.

The question I want to put to the panel is this: do you think there is an argument in saying that those people who were mis-sold those annuities that were not right for them should be compensated in many respects, and then allowed to use whatever is left in that pension pot to purchase new products? The point that I am getting at is that it seems there is unfairness in the system, even though I support the policy of allowing people to use the pension pots wherever they want to. Those people I mentioned have already bought into annuities that are now going through the floor because of this new policy coming about, and they are losing out. How do we address those people, who are tied into life-long contracts; who have not shopped round, as you said; and who, in many respects, have suffered from illness and been convinced by these annuities? How are we to help those people to enjoy the freedoms that new pensioners will enjoy? So, it is a very long-running question.

Dr Yvonne Braun: Unilaterally unpicking annuities and allowing customers who are already in annuities to effectively surrender them of their own volition is problematic. If you want annuities to have a role in the future, we need to recognise that as soon as you build that into the products they will become an awful lot less attractive for providers and an awful lot more expensive. The Bank of England and the Prudential Regulation Authority will have an interest in that, because they will have to be ready to fulfil a cash call at any time. That is a pretty difficult thing to make happen in the market.

Adrian Boulding: I do not recognise the product that you are commenting on. The annuities we sell are guaranteed, and they do not go down in value; they only go up in value.

Q 20

I am talking about annuities with profit, whose administration fees have cut into people’s pension pots and left them with nothing.

Adrian Boulding: We do not have any products that do that.

I am not accusing you of that.

Adrian Boulding: I recognise that.

You made a point about unpicking annuities, and I would like to pick up on what Yvonne said. The annuity contract is a contract between the individual and the insurance company. At the Government’s insistence, it contains a clause that states that it cannot be surrendered, which delivers two benefits to the consumer. First, it ensures that the payment continues for life, whether the insurance company likes it or not. Secondly, it enables the insurance company to invest in illiquid investments outside the gilts market, which deliver a considerably higher annuity rate to the customer. Our annuity book has 0% invested in gilts, which are liquid, and 100% invested in corporate bonds and infrastructure, which are highly illiquid. Therefore, we cannot contemplate surrendering the contracts.

Stuart Paton-Evans: I agree with that. They are long-term insurance contracts, and we guarantee to make that regular payment as long as the insured is alive. We match them to long-term liabilities. It is important in any discussion about this issue that we look carefully at the pros and cons. They are matched to long-term liabilities that are fairly illiquid, so there could be consequences to trying to unwind them. It is not an easy debate.

Q 21

I remember—this was probably before your time, Mr Paton-Evans—that Scottish Widows used to sell extra growth income performance bonds, which were investments in high-risk internet companies that flopped when the internet bubble burst. How do you see the type of products you are developing competing in the annuity market? How do you see the level of risk that you are going to build into your products? Have you any ideas about that yet? That question is for Mr Boulding as well.

Stuart Paton-Evans: Our primary focus is to ensure we are compliant for April so all our customers have access to the new flexibilities they will be afforded by the Bill. That has clearly got to be the key focus for us. We have products that will allow people to effectively meet their needs in a variety of different circumstances, such as when they make a financial decision. The changes will mean that consumers no longer have to make a financial decision at one point in time. They can move into a phased retirement or have a number of different options, and we will have a suite of products that allow them to do that. Beyond that, in the months and years following the changes that will come into force in April, you will see new products come into the market that reflect the decisions and choices that consumers make.

Q 22

I am concerned about the wording of certain bonds and products—I used the example of EGIP bonds because they stick in my mind. They were called extra growth income performance bonds, but  they were nothing of the sort. I am concerned about the labelling, because people will look at the products and think they are guaranteed. Mr Boulding, do you want to talk about the type of products you are developing and the guarantees that will prevent people from getting sucked into the idea that they are going to have bumper payouts? How will you inform them that there is a level of risk to the products they buy?

Adrian Boulding: The key facet that we are trying to address for consumers is volatility. Over the past five years, in the savings space, when they have been building up their pension pot, we have had what we call a multi-asset fund, which attempts to deliver equity-type returns, but with a much lower level of volatility. We have recently launched our retirement income multi-asset fund, which is intended to be used by somebody going into income drawdown. It develops the same low-volatility approach, but attempts to generate income, rather than growth. Our view for someone going into income drawdown is that they will need investments that generate income and the sort of real growth that you can get from a broad-based asset investment in equities and suchlike. They will not want volatility, which is very damaging if you are in income drawdown, hence we have launched a low-volatility retirement income fund. That is where we think we continually add something to what consumers want.

Q 23

There seems to be general agreement among our panel of welcome for this Bill, with certain caveats all round, two of which relate to these questions. Is there a danger that the promises inherent in the Bill will yet again lead to disappointment among consumers and those availing themselves of the products you sell? The industry has gained such a bad reputation over the years. I remember that back in 1997, when we came into office, a terrible case of mis-selling was already being investigated. Is there a danger that it will fall short? In particular, it seems to me that there is a real risk, given the extra flexibility. Will these pension funds be in a position to act as quasi-bankers and will it lead to an increase in charges in particular? What are your views on that?

Dr Yvonne Braun: A lot of that comes back to the pensions guidance. One of the dashed expectations might be around someone who is 55 now thinking, “I’m just going to access it all,” and expecting it to last 30 years. That is why we need a grown-up conversation between people and those who offer the guidance service: this is money you have saved and potentially you have quite a long time to cover in your retirement. That will help a lot with the mismatch between consumer expectations and what will really happen.

In terms of implementation of the reforms, providers—Adrian and Stuart can talk about that—are working incredibly hard to get ready and to make it all happen for April. I know that delivery partners are doing the same, so everyone is making strenuous efforts to be ready.

Q 24

Are you going to be ready?

Stuart Paton-Evans: As I said earlier, our predominant focus is on ensuring that our existing pension customers have the ability to exercise their choices under the new  freedoms, so come April we will be ready. We are working very hard to ensure that all of those customers will be able to do that. We will be ready.

Q 25

Is it right that only 3% in one case have actually taken up the option of legal advice? Is that correct? Was that you, Mr Boulding?

Adrian Boulding: I said that. We offered a pilot guidance a year ago and only 3% of consumers took it up. We will encourage consumers to take up TPAS and CAB guidance and I hope that rather more will take it up.

Q 26

Your powers of persuasion do not seem to be very great, if only 3% engaged with you on it.

Adrian Boulding: When we asked them afterwards why they did not take it up, they fell into two camps: half thought they already knew it all by themselves, and half did not want the delay—they wanted to proceed and progress their retirement today.

Decide in haste, repent at leisure.

Adrian Boulding: May I respond to your comment about whether we will fall short and whether people will have false expectations? I do not care what Stuart says: we will be ready in terms of products to meet the needs of customers and to deliver their flexibilities. I think the comments on banking in the media have been decidedly unhelpful. We are not a bank—in fact, we are described by the Financial Timesas a non-bank, which seems to be a new class of financial institution that we are proud to be a member of.

Q 27

You are a quasi-bank. That is my phrase.

Adrian Boulding: We will not be providing a cashpoint card or a hole in the wall. A pension scheme is not like a bank account. If you want to take money out, even under the new flexibilities, you have a raft of HMRC paperwork to go through, and it will take at least a couple of weeks to get the money out.

Q 28

Is that appreciated?

Adrian Boulding: No. I think consumers have been given completely false expectations by the media, and that will eventually come home to roost. The other thing I would say to consumers is that they can only spend the money once. I have a bank account that is topped up every month because I earn some more money in the form of my salary. This pension account can only be spent once by consumers.

Q 29

So perhaps we may say that all is set for another unpleasant set of disillusions among your customers.

Adrian Boulding: I hope that they will be responsible. If they have been responsible enough to have set money aside and saved for their retirement, then they will be responsible in terms of how they decide to spend it.

Q 30

Perhaps I could draw attention to the section of the Bill that contains a permissive statutory override to enable schemes to make flexible payments or provide a drawdown facility, even where the rules do not allow this. How do you think that might be used?

Adrian Boulding: I think it is a useful facility. It will apply in a small number of occupational money-purchase schemes where the trust deed was written many years ago and really did not envisage this sort of flexibility. It is very difficult for trustees to change their trust deed, so this is helpful to them—if they want to offer that. Actually, when you talk to a number of occupational money-purchase schemes, you find that they are split. Some want to offer the new freedoms and flexibilities, and others do not because the employer is very much of the view that when the employee reaches retirement age, they want them to go somewhere else. I believe we will see that when members of schemes which do not offer those flexibilities reach the point of retirement, they will transfer to another insurance company which is keen to provide those flexibilities, and to bring money in and help consumers.

Q 31

I was really disappointed when I heard Adrian say that less than 3% of people offered guidance actually took it up. That was below even my expectations. In some respects, that reflects what we have seen in other countries which have gone down this route. There are risks here, both for the individual and for future Governments. We may get a short-term boost to the economy, but a Government at some time in the future may well have to pick up a great deal of the cost of these people falling back on the state. Do you believe that we should now build into the Bill new regulation to protect consumers drawing down money directly from their pension fund? If we do, what would you want to see in that regulation?

Adrian Boulding: I do not. I think we have taken a huge leap. We have said that we will put our faith in consumers being responsible in how they spend their retirement money. I fully support the idea of guidance and whatever help we can give consumers in doing that, but we have taken that leap. The toothpaste is out of the tube. We have told consumers that it is their money and it is up to them how they spend it. Now we press forward and do our best to support them with products, information and guidance. I do not think we should be setting rules in place that say the new flexibilities are only for some consumers—who I think would be wealthy consumers—and not for other consumers who are perhaps on a lower income.

Stuart Paton-Evans: We agree. We are working very hard to ensure that we have processes that point people to guidance and make sure that they understand what their options are. We are also providing information so that they can have a clear understanding of what options are available to them, and what type of solutions might be out there to provide whatever it is that they are looking for in their retirement. The majority of our consumers still tell us that they are looking to get a regular income out of their savings, wherever they have been sourced from. We also make it very clear what the consequences are of any decisions. We are putting responsibility on the consumer, so it is very important that we work together as an industry—across all the various bodies, including consumer groups, the regulators and ourselves—to ensure that customers have as much information as possible.

Q 32

I will be very brief. Two of the witnesses sound a bit like Pontius Pilate—that is how it comes over. You have tried to use all your encouragement  and all your persuasive powers to get people to take legal advice. Only 3% take it, and you say, “Up to you.” It sounds slightly as though we are entering an area where you are saying, “Okay, it’s up to you. We are not responsible. We have told you that you are responsible,” and hang the consequences. I know that you are much more responsible than that, but I do not think that it is quite enough just to say, “It is your responsibility and we have told you that. Now let’s see what happens.” That is not quite good enough given the history of this industry.

Dr Yvonne Braun: That is probably not quite fair.

Perish the thought!

Dr Yvonne Braun: I appreciate that the 3% take-up in that pilot is not what we would like to see next year; that is why it is so important that we are working with Treasury officials and, indeed, the behavioural insight people, to make sure that the encouragement is really strong and works with all the things we know about how you get people to take action and what devices there are, for example, around loss aversion and the fact that it is free. As we said before, and it is worth restating, we feel very strongly that consumers who do not take up the guidance still need protection, and that providers have an important role in that. That is why we have the principles in the code, which we would like to see replicated, whoever offers retirement income products.

A even bigger concern for us all is scams and fraud arising from this; we are still talking about the regulated industry, but the threat from scams and fraud is greater still. It is very important that we do not lose sight of that and do our utmost to prevent it.

That provides a measure of reassurance.

Q 33

This is a question for all five of you, but particularly for Citizens Advice. Looking at the range of options in the Bill as it stands, but also at the media hype that has surrounded the Bill, what are the key messages that you think consumers should take away?

Rachael Badger: It is important that people understand that there is broad range of choices here and that there is help for them to make those choices. A lot of support is being developed at the moment and it will be in place from April. I think that people should be reassured by that.

Stuart Paton-Evans: We would say that consumers can be retired for a very long time; they do not have to make a decision in April. They now have the flexibility to consider what they are looking to get from retirement, whether that is a full retirement or a phased retirement, and to plan their finances accordingly. The other key message that we need to continue to reiterate as an industry is that planning for retirement is a 20-year journey: people need to save more and save earlier.

Adrian Boulding: I would say two things. The first is that this is your pension pot and you can only spend it once. The second is that you are likely to live for a long time in retirement. A reasonably healthy 65 year-old can expect 24 years of retirement. We know that because we have half a million annuitants on the books and we  measure the rate of drop-off. Most consumers out there do not know this, but we will be telling them in our product literature.

Dr Yvonne Braun: I agree with all that. The only additional point I would make is that we should also say that this is not a deadline for consumers to do something; this is the beginning of a new environment. People do not all have to take decisions next April. They have the freedom to, but it is not a deadline for them; it is a deadline for us.

Jon Allen: I have nothing to add.

Q 34

I would like to explore a bit further with Ms Badger what a guidance session provided by Citizens Advice would look like. What can our constituents expect if they go for a guidance session at a citizens advice bureau?

Rachael Badger: The FCA consultation on guidance standards is still going on, but we are working very closely with the FCA, the Treasury and TPAS on that. Guidance sessions will be tailored to people’s circumstances. They will cover things such as tax benefits, possible social care needs, savings and debt; there will also be signposting to regulated advice if that is appropriate. It will be a supportive place to think those issues through, especially for those who lack confidence in making decisions in this area.

Q 35

To be clear, it will not be simply an information session; it will be a discussion of the person’s personal circumstances?

Rachael Badger: Yes. It will be an interactive discussion.

Q 36

Okay. You mentioned signposting to financial advice. Do you anticipate that that will be required by a lot of the people who are seen by Citizens Advice?

Rachael Badger: It certainly ought to be an option to be put to people at the end of the guidance session in most cases. It is something that we are very used to doing in Citizens Advice; we often signpost people on to other services, be that a solicitor, a financial adviser or whatever, so it is already a core part of how we work.

Q 37

Just to be clear, will those providing the guidance be given, uniformly, contacts and information about financial advice services?

Rachael Badger: Yes, of course.

Q 38

The Pensions Advisory Service will also be providing guidance sessions. How will Citizens Advice’s sessions compare?

Rachael Badger: As I said, we are working closely with TPAS and the Treasury on the detailed service design. At the moment, the proposal is that our sessions will be face to face and the TPAS role will be on the phone, so there will be slightly different channels for delivery but we envisage the process being similar.

Q 39

My understanding is that the advisers at the Pensions Advisory Service will have at least 10 years’ experience in this area. How does that  compare with what Citizens Advice will be able to provide? How will you ensure that Citizens Advice’s workers are trained in time?

Rachael Badger: We are confident that we have time to recruit and train people to do these jobs. The subject matter will be slightly different from some of the generalist advice that we already give, but we have a really strong infrastructure for training people quickly on really complex subject matters—that is our core business; it is what we have been doing for 75 years, and I do not think that what we are discussing is really that materially different.

Q 40

Will the guidance sessions be delivered only by employees, or will volunteers also be involved?

Rachael Badger: It will be paid staff.

Q 41

It will all be paid staff. Okay. I have a final question about benefits. Do you anticipate the legislation having an impact on people’s entitlement to means-tested benefits? Is Citizens Advice prepared to give advice on that?

Rachael Badger: Yes, absolutely. Our particular strength in this role is that we are able to see people’s money issues in the round. We are really experienced in advice on things such as the state pension and pension credits, or on housing benefit, council tax support, support for mortgage interest—there is a long list of interactions. The important thing is that people, particularly those with smaller pots, will have to understand that the choice they make at retirement might have a significant impact on their entitlement to means-tested benefits. There is a really important information and communication piece there.

Q 42

I am tempted to try to walk you through a roleplay of what a guidance session might look like, but I suspect we do not have time. Nevertheless, while we are on the topic, have you thought through how you will get people to prepare for the session, so that they come knowing what their financial affairs are, what pension pots they have, their debts and other savings? How do you get them to do that before they turn up?

Rachael Badger: We will have to await the conclusion of the FCA consultation in terms of the details on the specifics of the session, but the process of people coming to us with big stacks of paper that they want us to make sense of is really quite familiar. For example, if we are helping someone with debt problems, we will have a list of set questions and pieces of information that we ask them to bring. That can happen over the phone, through a triage service, before people come to see us for their face-to-face session. I imagine that the new sessions will work in just the same way.

Q 43

I want to ask Mr Paton-Evans and Mr Boulding a completely different question that I asked the previous panel of witnesses. What are you doing for people who signed up to a pension scheme 20 years ago, told you that their retirement date was 65, and were probably assuming that they would take an annuity when they hit 65? The landscape has completely changed for them. On your numbers, Mr Boulding, only 15% of them will take an annuity now. What are  you doing to their pension scheme? What are you saying to them so that they understand that they might need to give you a completely different set of instructions if they are not going down their original plan?

Adrian Boulding: We have two halves to our business: one is a master trust and the other is contract based. The master trust has trustees; the contract-based half has an independent governance committee. We have asked both of those bodies to look at the de-risking profile that currently we use on our default funds. You are quite correct that our current de-risking profile is preparing people for a landscape where they arrive at state pension age, take 25% tax-free cash and put the other 75% into an annuity. That is not what we think they are going to be doing, going forward from next year, so the current de-risking profile is wrong and we have tasked those two bodies with reviewing and changing that.

They will probably change it in two steps. I think they will have a first step early next year and then come back and review that in another couple of years when the market has settled down and we have got some real data on what people are doing at retirement. It will take two steps, but we will get that change because they are in yesterday’s land and that will not be the pattern going forwards.

Stuart Paton-Evans: There is a very similar process within our organisation: we will be changing the default lifestyling glide paths in those products. I think the key point is that we still need to see what consumer behaviours will be. We are doing as much consumer insight as we can, both with those coming up to retirement now and with 55-year-olds as well, asking them what their plans may be.

I said earlier that some of our research has shown that, with the new flexibilities, some people will choose to take some financial decision on their retirement planning earlier, but also a lot will defer some those decisions to a later date. So trying to get a clear understanding of what the consumer’s needs are and what their behaviours will be is key. For example, we have 500,000 people who will be 55 in April who could call us up to inquire or make some different decision. This will be an iterative process in the coming months and years beyond April, as Adrian said.

Q 44

Do you envisage that you might default people into a different glide path from the one they are one, unless they tell you, “Please don’t de-risk me; I’d like to do some kind of drawdown when I reach retirement age,” and you leave them on their current plan?

Adrian Boulding: We have a particular contractual difficulty with this. On the trust-based side of our business, the trustees can move people and put them into what they think is now a more appropriate glide path for them. On the contract-based side of the business, we do not have that legal power to do that, so when we change the default fund on that side—we did change it three years ago—we communicate with people. We write out to them to tell them there is a default, why that is, and we tell them that new entrants are going into the new default and that, if they would like it, they should tick here or push that button there, but, actually, the majority of them do not.

That is a particular contractual problem that we have. We have raised it with both the Financial Conduct Authority and the Department for Work and Pensions. The difficulty from a contractual point of view is that if we move them without their permission, we are liable for any investment underperformance that they suffer in future, but if we do not move them, they are sat in yesterday’s model of default when we would much rather that they were in today’s model. We have a contractual problem, so we would quite to see some overriding legislation and some safe-harbour provisions from our regulator. We have raised that with both DWP and FCA and we hope that they will listen.

Q 45

I want to come back to a point related to an earlier question to Rachael, which is on unintended consequences. We have heard a lot about the choice people will have to use the drawdown facilities, but my question is about the current security legislation and rules, which a constituent has brought to my attention. Those rules say that a person who is over the qualifying age for pension credit and has a pension fund that they have not accessed can be treated as though they have accessed that pension to buy an annuity. Has Citizens Advice done, or will it do, any assessment of the implications for people once the new rules are in place? Could many more people be brought into the category in which it is assumed that they have bought an annuity when they have not?

Rachael Badger: That is something that the Department for Work and Pensions is looking at and I think that is useful. The notional income and deprivation of assets rules in means-tested benefits might not need to change, but there might need to be additional clarification or, if not, case law to explain what this means and to communicate more clearly to consumers in the context of the reforms in the Bill. It is hard to predict how many people will be affected until we know what starts to happen over the next few years.

Q 46

I was interested to hear Mr Boulding and others on the panel say that one of the problems is the response. It comes back to engagement and the ability to communicate with your customers clearly and in such a way that people feel inclined to respond. I can sense the difficulty you have. You really seem to have given up on it a bit, as though there is nothing more you can do than send round circulars. I have seen them myself and can well understand, given the textual analysis you often have carry out to understand them, that people just do not get to the end of them and unfortunately do not take any notice. Is there no way you can improve on that rather than sitting back and saying, “There is nothing more we can do. They do not fill anything in, and only 3% take legal advice, so what more can we do?”

You said it was half a million people, and I appreciate that it seems a formidable task to find some better way to get through to them, but surely there is some way of provoking more response. I am not suggesting a helpline that nobody gets a reply from, or anything like that, but it is worth giving some thought to it and perhaps engaging with people who know better how to get responses in that way. It is not satisfactory as it is, really.

Stuart Paton-Evans: We are investing a significant amount of money in transforming our business so that we can help our customers make the most of these new  flexibilities and so that we provide an enriched journey for the customers who come through and are looking to get information, help and guidance to make those decisions. We have already sent out six-month packs to people who will be affected from April, and we have built and launched a new website that provides a considerable amount of information on the various options available to people. We will continue to invest in how we communicate with our customers across a variety of different media so that we can ensure that they get as much help and information as they need.

Q 47

I am very relieved to hear that. The effect of this Bill in general is going to be a much greater devolution of responsibility, decision making and flexibility on the customer, is it not? Unless you take corresponding steps to ensure that engagement actually takes place, we are going to have another big mess on our hands, so I urge you to do exactly what you are saying and perhaps even to increase what you are doing in that respect. Otherwise it is not going to work.

Adrian Boulding: I fully second that. We need customers to take informed decisions that they understand. In the long run, if they take decisions that they do not understand, it will come back and bite us. Our main method of communication is writing out, and our regulator expects us to write long, extensive letters that contain all the information that a customer could possibly want. But we also encourage people to ring us up, and we hope that when they get a long and complicated letter they will ring our help desk—we put the number prominently on the top—because talking to somebody one on one, over the telephone, you get a lot more across than by sending them a four-page letter.

Absolutely, but I hope your helpline works better than most helplines do. Frankly, you get shunted from pillar to post on these helplines, particularly Government ones—it is impossible. If you are going to do it, make sure it works—that people get through and you have enough advisers. It is an investment now that will pay back later. Otherwise, as I say, we are heading for great disillusionment with the scheme, at the best; we know where the worst leads.

That has brought us to the end of the time for this panel of witnesses. I thank the witnesses on behalf of the members of the Committee for your time today. As the Chair, I have found it fascinating—particularly knowing what age I am going to die at. Thank you very much indeed. We will now change witnesses.

I take this opportunity to remind everyone of the two minutes’ silence. When I interrupt proceedings for the two minutes’ silence, I think it would be appropriate that we stand.