It has been suggested to me that at the time when the announcement was first made on pension reforms in the Budget, the industry’s immediate response was one of shock, followed by what was described as aspiration to meet the considerable challenge that was presented to the industry. I am wondering, in the light of everything that has transpired since, whether there now need to be further changes to the Bill, or to some of the approach to guidance, in the light of what has been said. I wonder if the Minister and his colleagues could perhaps say something about that, particularly in relation to more detail on the behavioural assumptions behind the estimates of the Exchequer impact of the Bill in the autumn statement. I think we have heard from witnesses this morning, and from others, that there is still a degree of uncertainty. Also, is there going to be more information, and when can we have that, around the distributional impact of the measures in the Bill?
Mr Gauke: Let me try to address a number of points that you have raised. First, in terms of the Budget announcement, such was the nature of the announcement, clearly it was market-sensitive, and therefore, yes, it would be fair to say that the industry was not expecting the announcements that were made at the March Budget; but that was an inevitable consequence of a radical reform of this sort. Since then, as you described it, I think the industry has worked hard to be ready in time for April and the new regime. We have heard today from a number of pension providers that they expect to be ready for the position in April.
In terms of the likely behavioural impacts, that will depend on decisions made by many thousands of people with respect to the new circumstances. It is difficult to know for sure exactly how people will respond to the new flexibility that they will have; but we made an assessment at the time of the March Budget that was considered and verified by the Office for Budget Responsibility, in terms of the impact on the public finances. Since the Budget, there have been a number of further policy announcements, as we have worked through the detail, and those policy announcements will again be reflected in the autumn statement, in terms of numbers.
Since the announcement at the Budget, there has been very considerable engagement and consultation, and we have worked up these proposals, working closely with the industry, with consumer groups, with the Financial Conduct Authority and other regulators, to ensure that we are in a position to develop the greater flexibility that the Chancellor set out in the March Budget.
The impact for consumers: the underlying point here is that there is much greater flexibility and choice available. We need to ensure that consumers are able to exercise that flexibility and choice in as well-informed a manner as possible, which is why work has been ongoing to do with the guidance guarantee, which we are covering today, but which is predominantly relevant for the Pension Schemes Bill.
Could I follow that up by asking another fairly brief question? In retrospect, Minister, do you think it was helpful that the new flexibilities and choice were portrayed as almost being like people having another bank account and being able to withdraw money to buy their Lamborghini or pay for their holiday or whatever else? Some of the key issues around the tax implications have been lost in that process.
Mr Gauke: It is important that consumers are well informed when they exercise their choice in future months and years. We are giving substantially greater flexibility to people. What drives that is a view that these pension savings are the property of the individuals concerned. We should give them as much flexibility as possible in determining what they do with that. That is, of course, in an environment where we have made some broader reforms to, for example, the state pension. The universal state pension will be at a more generous level than it has been in the past, so people are less likely to fall back on means-tested benefits.
It is the case, as previous witnesses have made absolutely clear, that—save for the 25% tax-free element—people will pay tax on the money that they draw down. It is right that people are aware that they are paying tax at their marginal rate on the sums that they draw down from their pension. That is one of the points that people need to be aware of as they make use of that flexibility. It is entirely fair that the system will be what it is going to be, but I certainly agree with the point that people need to be aware of that consequence of drawing down sums. As we have heard from particular witnesses, if people wish to draw down very large sums all at once, they run the risk of moving themselves into a higher tax bracket than they would otherwise be in. That is unlikely to be in their best interests.
We heard a lot from the witnesses about it not being a one-off decision that people will make. They will now be considering things over a number of years, yet the way the guidance guarantee appears to be set up is that the decision would be at an early stage and people would not have access to come back at a later stage. Is that adequate, given what we have heard this morning from the providers?
Mr Gauke: The first point I will make—I will bring Anna in on this, as well—is that the point at which consumers or savers are most likely to be focused on this is at the point where they are reaching retirement and considering their options. The point where take-up of guidance is likely to be higher and where the guidance is most likely to be effective is when people are focused on those big decisions.
It is perfectly fair to say that the nature of retirement is changing. These reforms help with that. The greater flexibility that these reforms bring helps people who might make a decision to retire but then consider coming back into work immediately or shortly thereafter perhaps on reduced hours or as a part-time arrangement or so on. They can decide to take a couple of years out of work and come back in and so on. The greater flexibility we have here is helpful, but it raises issues on how we can deliver the necessary support. It is also worth bearing in mind that what will be available with the guidance guarantee is a lot of online support that can be accessed at almost any point. There is greater choice and availability with the guidance guarantee than the idea that you have one chance and that is it, but perhaps I can bring Anna in on that.
Anna Deibel-Jung: That is absolutely right. The only other point I would make is that providers and schemes communicate with their customers throughout the accumulation phase of their pension saving. What we are doing in the guidance guarantee is designing the services and thinking about how that fits into that wider programme of communication that customers will get from their providers and how that fits into that wider landscape.
I also put to the Minister the question that I put to Citizens Advice in the previous session in relation to the issue of choice. To what extent will there be real choice for some individuals, particularly those who may find themselves in a situation where, because of the social security rules, they are assumed to have taken an annuity or drawn down a pension, when they have not? Are people going to find themselves pressured to do that? What are the impacts on means-tested benefits and the longer-term implications for social care?
Mr Gauke: First, the guidance that will be available will be designed to ensure that people are aware of the impacts, as far as social care and means testing are concerned. We do not desire people to be in a worse-off situation than they would have been previously under the old causes and consequences of pension flexibility. Sophie, is there anything that you want to add to that?
Sophie Dean: We have said that the principle is that the decision that you make on how you access your pension should not significantly affect how you are judged or measured for social care or welfare. We will make sure that, whatever the product choice you make, you are treated in a consistent way, whether that is in flexi-access or through an annuity, so that the treatment across the board is fair and consistent.
Would that necessitate a change to the existing social security rules, which allow a decision to be taken, on the assumption that someone has access to their pension, when they have not?
I think it has been recognised that the new flexibilities create a potential tax loophole, with people taking their income and putting it directly into a pension pot; drawing their pension pot immediately and getting tax relief on that. By reducing the amount that can be taken to £10,000, there is obviously a mitigation of that. However, evidence was given by John Greenwood, who estimates that if only 10% of people aged 55 and over take advantage of this loophole, the cost to the Exchequer could be £2 billion. What is your estimate?
Mr Gauke: We will be setting out estimates in terms of all the measures and decisions that we have taken at the autumn statement. The OBR will verify that. It is fair to say that a number of assumptions were made in the analysis to which you refer, which we think are somewhat unlikely. We have sought to retain a balance between addressing the recycling concern and fairness to those who have accessed their pension flexibly. In a world of more flexible retirement, which I talked about a moment ago, where people may wish to retire and take one pension, but then to take another job and contribute towards a pension in that job, the idea that we should have a zero annual allowance and say that anyone who has made use of these flexibilities should no longer be able to contribute towards a pension, would be unfair. We have sought to balance the two competing objectives of fairness for those who have accessed their pensions flexibly but wish to continue to contribute, with fairness in ensuring that this does not create a tax loophole, which is expensive to the general taxpayer.
We will continue to monitor this. If we see evidence of further abuse in this area, the Government have been very clear that they will take further action in this area. However, we believe that the route that we have got to—as you say, Mr Dakin, the restriction to £10,000 for people who have accessed their pension flexibly—strikes the correct balance. Ed, is there anything you would like to add?
You are saying, Minister, that there will be clear monitoring of this, and that action will be taken where necessary. Do you see a point at which there would be some sort of report on this, so that Parliament could be aware of any issues and support you in any action you need to take?
Mr Gauke: I do not think there is an intention to have a report on a specific occasion. What I would say is that, clearly, the Treasury and HMRC would want to monitor any fiscal risks. If we identified this as something that could cost the general taxpayer significant sums of money, that is something we would want to address. Of course, it is always open to Members of Parliament to table parliamentary questions and so on, but it is clearly in the interests of the Treasury and the general taxpayer to ensure that this is not something that is exploited in such a way that we see an acceleration in the cost, in which case the balance would shift, and the Government would seek to take further action.
I think I am right in understanding that you are essentially saying that you do not recognise Mr Greenwood’s estimate of £2 billion and that we will have to wait for the excitement of the autumn statement to discover the figure you would put on this.
From my experience of the Treasury, they must have made some estimate. What is their estimate? If you do not recognise that figure, you might recognise £1.9 billion, which would be the same sort of thing. What is the Treasury estimate for the loss to the Exchequer?
Very well. From our previous session with the panel of experts, it was clear almost everybody agrees with the principles of flexibility and welcomes the Bill in general and in principle—nobody can really oppose it. But there is a real danger that things can go wrong, with the Exchequer losing far more than it expects, which would be par for the course—I think your experience must have shown that already, Minister. It could also be the other way round, and the provisions might not be used very sensibly by customers, as they are called today—pensioners, to us—who will have this greater flexibility.
Much is made of the advice guarantee, but what came out of the previous session was that the actual take-up has been as low as 3%—3% of people will be taking this advice, if I have not misunderstood what that reference was to, and I do not think I have. Is it not the case with the Government and the industry generally—we all come up against this—that the language is so detailed and the textual analysis required is so complex that people simply do not reply to circular letters? Indeed, that was confirmed in the previous session.
The question really is—this applies to the Treasury, Government in general and the industry, who are all caught up in the same problem—how do you get through to customers in a more engaging way, if this is to be a success, as opposed to just another change that benefits a few tax avoidance experts and others who know how to work the provisions? That is the real danger of this, along with the loss to the Exchequer. How do we engage with the people to whom this could be of great benefit? Is there not something we could learn from social media or even from the National Employment Savings Trust, which I understand has a good access system, rather than a helpline you never get an answer from? We have all been through that frustration—even you, I am sure, Minister. What are you going to do to make this a success, as opposed to another change on this tortuous road—
I am a bit disappointed that we have not had an answer, Ms Dorries. I am asking the Minister very clearly what he is going to do to make this a success by engaging in a more accessible way with those who are set to benefit from it or who would be affected if it fails yet again. I apologise if that was not clear from my question.
Mr Gauke: It is interesting to hear the experience of the Legal & General pilot, which, as was made clear, predated the Chancellor’s Budget announcement. We are in a slightly different place here. First, there is much greater flexibility and a wider range of choices available to savers now than was previously the case. There are more choices and bigger decisions to be made. Secondly, we are putting in place the guidance guarantee and a whole new infrastructure to provide guidance, whether that is the face-to-face service provided by Citizens Advice, the telephone service provided by the Pensions Advisory Service or the online service that is also provided. There is a new infrastructure in place.
I was also struck by the evidence we received earlier on the degree to which pension providers are very keen to signpost the guidance guarantee and the determination to ensure that this information is available to people. There was also a sense of a shared interest from the industry, the Government and consumer protection bodies to ensure that this information is more widely available. It struck me that since the March Budget there has been a greater level of interest and engagement from the public in these issues. To some extent, although this can be a little circular, the more that you trust people, treat them like grown-ups and give them choices and responsibility, the more likely they are to engage in the choices that are available. To the extent that we take a very paternalistic view and say, “You must do this and, once you retire, this is the product that you must have,” it is not surprising that people will be little engaged.
You also raise very sensible practical points about how we ensure that there is that engagement. A lot of work is undertaken by, for example, the behavioural insights team to ensure that we are sophisticated and up to date in using techniques to make sure that people engage and take an interest in this area. Anna, is there is anything you would add to what I have said?
Anna Deibel-Jung: There are a couple of practical things that we are doing in the Treasury as part of implementing the guidance guarantee. First, we are making the guidance guarantee as engaging as possible. The previous panel mentioned that research found a 90% take-up rate, so 90% of people who responded said, “Yes, we would like to take this up.” We have recently seen research from the Chartered Insurance Institute that also suggests a figure around the 90% mark, which gives a sense of the level of consumer interest in taking up guidance. There is already interest and engagement, and it is about putting that into practice. As part of the service design work and the user testing that we are currently doing, we are working out what makes people engaged, what excites and interests them and what would make them go on the website, pick up the phone or make a face-to-face appointment.
The other thing to mention, and again I refer back to the previous panel, is that the industry is already very involved in the signposting work that we are doing. We have a lot of volunteers from the industry who are keen to work with us on pilots so that we can understand how best to do our signposting work and what buttons we can press to get people to respond. We are using the piloting work that we are doing to understand the level of take-up so that we can get a better grasp on that and work on ways to get people involved.
I take that point and am reassured, as I was when we got into discussion with the previous panel. The issue seems to be a bit like this: we are all in favour of treating people as adults and engaging them in serious conversation, but the problem is how we get to that point given that, by definition, there is this age gap. By definition, at the moment we are dealing with a particular generation who did not grow up with the internet. They do not have that facility with social media communication that their grandchildren do. There will not be that problem later, although there might be others, but is it not the case that we have a generational problem? If the thing is to be a success, as opposed to being simply another change, and just that, we have to find a way of engaging that particular generation. I am not sure how that is to be done, but I am not yet convinced that we are anywhere near practical implementation in that regard, despite all the words of assurance from Anna and the previous panel of experts.
Anna, you talked about a pilot with a 90% response rate. There is a massive gap there with the 3% that the earlier witness told us about. There appears to be a huge gap between hope and reality. Will you tell us a little more about the pilot?
Mr Gauke: In terms of a second line of defence, obviously there is the guidance guarantee, but there is also the information that should be provided directly by the providers to consumers. It is what is put in front of savers when they are making decisions outside the guidance guarantee process. There is a role for the FCA to ensure that providers treat customers fairly. We must have a regulatory system to ensure that even those savers who have not made use of the guidance guarantee are aware of the impact of some of the decisions available to them. I do not know whether Sophie or Anna want to come in on that.
Mr Gauke: The point I am making is that it is not as simple as saying that there is the guidance guarantee and that no other protection is available to savers. There should be additional protection available to savers, and that is done through the regulatory requirements placed on regulated firms to ensure that the information they provide to consumers and potential purchasers of their products is such that those savers are treated fairly.
We are all, I hope, intelligent and grown-up people. I think we recognise that if we do not introduce a form of compensation, five years from now the courts will. Given the history of pension mis-selling in this country, the courts are likely to be much harsher second time around. Do you intend to introduce some form of compensation for people who have been sold unsuitable products but not taken financial advice, and in particular for those people who had not been advised by the product seller that they needed to seek independent financial advice?
Mr Gauke: To some extent, I come back to the evidence that the FCA gave earlier this morning. What is the nature of the relationship between the consumer and the product provider? Are we talking about a relationship where advice is provided and advice is properly and heavily regulated by the FCA? Are we looking at an execution-only arrangement, in which case there are still issues of ensuring that appropriate information is provided to people? It is not possible to give a simple answer, because it depends upon the particular circumstances and the nature of the relationship between the consumer and the product provider. It is important that the Government ensure that consumers have easy access to the guidance guarantee, that they are made aware of the consequences of any choice that is provided to them, whether through the guidance guarantee or through regulated firms complying with their regulatory obligations, and that they go into any particular arrangement with their eyes opened and with all the information that is available to them.
Given the history of pension mis-selling in this country, have you considered that the courts may take the view that the Government should pay compensation if they allow such risks to occur? You would therefore leave the Government, not just the industry, open to future compensation claims.
In the past four years, I have dealt with a variety of quite harrowing cases of constituents who have been subjected to different frauds. Reporting them, whether to the police or Action Fraud, is complex, and some have been passed from pillar to post. The introduction of greater flexibility has led to a concern about the increased potential for fraud and for unscrupulous individuals to encourage people to put their money into ill-advised schemes. Given the greater flexibility, has the Treasury made any estimate of the potential for increased fraud?
Mr Gauke: You are right, Mr Stephenson, to raise the importance of fraud, and it is vital that we take firm measures to address it. An amendment to the Pension Schemes Bill will create a new criminal offence for those who are scamming or pretending to be providing guidance when they are doing no such thing. The FCA is also engaged in ensuring that the position is clear for both regulated firms and unregulated firms—were they to get into this area. I do not know whether Anna wants to say anything on this.
Anna Deibel-Jung: I have a couple of points. One of the guidance service’s objectives will be to raise awareness of scams, so that consumers know what to look out for and avoid. It is also worth mentioning the FCA’s work on ScamSmart, which is its latest consumer awareness campaign on scams and fraud.
Thank you for that. When dealing with constituency cases, there are quite often mixed messages depending on whether people go to the police, ActionFraud or the FCA. People are sometimes unsure where to turn and then things go further down the line and become worse. People could be losing their entire life savings if they are scammed out of their pension pot.
Mr Gauke: You raise an important point. As I say, the new criminal offence in the Pension Schemes Bill is relevant to this area. You are also right that it is an important transaction, and I emphasise what Anna said about the importance of the guidance guarantee and how that assists in dealing with fraud in this area.
I am sure I am not the only one to have had constituents in their surgery just after this policy was announced complaining that they were locked in as they had already purchased annuities, in some instances on the day before. Is that something that the Government will address? Will there be any action for those people affected in the last days and weeks before the announcement? Will there be any way for them to get that money back?
Mr Gauke: It is very difficult to address that problem, because a contract has been entered into. Of course, one can understand and sympathise with people’s frustration, but one has to draw a point in time where the flexibility comes into place. Inevitably, if you draw a point in time there will be those who fall just before that point. It is extremely difficult to try to unravel contracts that have been entered into. Does anyone have anything to add to that?
Ed Lidington: A number of providers extended their cooling-off periods for people who had bought annuities just prior to the Budget. The Government put in place provisions in the Finance Act 2014 to allow providers to do that. We have shown a bit of flexibility there on that front for those people who bought annuities just before the Budget, where the provider is willing to give them that flexibility.
Absolutely, that was the case, but as you know and have just referred to, that was up to each individual provider, if they wanted to extend that cooling-off period, even though the Government allowed that to happen. Would it not have been better to make it mandatory for the companies providing annuities, in order to ensure that everyone, no matter which company, was given that flexibility?
Mr Gauke: Because the providers had entered into contracts and would have made investment decisions as a consequence of their position at that time, a mandatory system as opposed to a voluntary one may well have caused a number of difficulties and some unfair outcomes. The approach we took, in terms of doing everything we could to facilitate and help consumers caught in that position while working with the industry on a voluntary basis, was a sensible and pragmatic response to the situation.
I have constituents who disagree and feel that they did not have all the information available to them at that time to make an informed decision; that decision will affect them for their whole lives.
Mr Gauke: There is an inherent difficulty; a consequence of providing flexibility is that there will always be a cut-off point. One could extend it and go further back, but is then left with someone else who has entered into a contract immediately before that cut-off point. Although I have a lot of sympathy for your constituents, it is fair to say that they were in no worse position as a consequence of these changes than they believed they were in when they entered into the contract.
I think that they might dispute that. I will not labour the point, but I would highlight that Mr Lidington said that there was a way around this and it was not taken. I would also like to ask about future insolvency proceedings. Do you think that there will be any impact on insolvency proceedings as a result of the option that people now have to withdraw money from their pension funds?
If I was working as a senior executive in the industry, I would be angry with the Government about this. How much consultation was there with the industry and executives before this decision was made? It seems to me, from reading the press, that we have made the changes but many companies will not be ready for 6 April. As was mentioned by my colleague from Airdrie, these people would have already purchased the annuities. The industry would have been selling these annuities as well. They would not have been allowed to create new products in readiness for 6 April. How much consultation was there with the pension industry before this announcement was made at the Budget? What assessment have the Government made of the industry’s readiness to make arrangements for these changes before 6 April?
Mr Gauke: In terms of consultation, I will come back to the answer I gave earlier: this is clearly very market sensitive, as could be seen by the movements in the market on the day of the Budget and in the days afterwards. Consequently, it was not possible to consult fully with the industry in advance of the Budget. However, there has subsequently been extensive engagement with the industry, and consultation papers and responses have been published. There has been a huge amount of work and very strong engagement from the industry in this area. We are grateful to the industry on that front. We also heard from industry representatives that they expect to be ready for April. This is a major change. The industry has engaged in a constructive manner and has taken steps to ensure that it is ready to offer good service to its customers by next April. I believe it is on track and that, before next April, greater choices and flexibility will be available to the British public. I believe that that is a good thing.
In terms of reform, I have no doubt that additional products will be developed over the months and years ahead, and that the market will change over a period of time, not just suddenly—it will not be a case of saying, “It is like this one day and like that another day.” The industry is gearing itself up to be ready.
Can I be a bit mischievous? As you know, the Minister for Pensions has had a lot of publicity in the financial advisory world about unwinding annuities, and has said that the Liberal Democrats could commit in their next manifesto to providing compensation to those who have been mis-sold annuities. His argument is that the annuity market is broke and needs fixing, that it has been that way for many years and that people should be compensated. What is your view? Might that be in the Tory manifesto?
Mr Gauke: Well, Mr Evans, you are right—you are being mischievous. It is not for me this morning to set out what will be in the Conservative party manifesto. I am here to answer questions on the Bill before us. I think annuities will continue to play a role in our pension system, but the pension system, as was, was not working for large numbers of people, and greater choice and flexibility were needed. That is exactly what the Bill will deliver.
This is the last question, Mr Gauke. You have been very charitable today. How confident are you with the vast majority of advisers? As you know, I have worked in the industry myself and have seen a lot of rum practices. The people doing those things would then move companies, and by the time they were caught they would have been through eight or nine companies and messed up a lot of customers’ investments. How confident are you about the quality of advice and the charging regime for that advice, especially now that many people who would not have used advice before will now need it?
Mr Gauke: It will be an important period for financial advisers. We should not think that there will be a sudden surge at the beginning of April next year. I think we will see a gearing-up in which more people will want to seek financial advice. The regulator has an important role. It is there to ensure that financial advisers comply with their regulatory obligations, and the FCA is very focused on that. We now also have a new service in the guidance guarantee, which I believe complements independent financial advice and will point people in the right direction.
Listening to the radio Saturday lunchtime, I was struck by how the sector is evolving. There are now far more products, for example, whether they are websites or comparison products and so on, setting out more information about financial advisers, such as who has a good record, to get more information out to consumers about where they need to go to find good financial advice. Not that long ago, I do not think there were any products comparing financial advisers, but currently there are two, with another two about to enter the market. It is striking how the market is responding at this stage to what you and I both think will be an increased demand for that type of advice. Sophie, was there anything you wanted to add?
Anna Deibel-Jung: One thing to add is that we will be thinking carefully about the hand-off—when we signpost individuals who have used the guidance service to independent financial advice—so that people understand the charging structure. Obviously, with the new rules from the FCA on the retail distribution review, it is now quite different.
I know it was my last question, but I have two concerns. I cannot be a financial adviser. My qualifications are not worth the paper they are written on any more. There has been so much constant and rapid change in the qualifications to become a financial adviser and I fear that we will see more change and more uncertainty. The other thing that I have noticed since I left the industry is how wildly the charges—
Yes. In view of how wildly the charges swing between different financial advisers, could you give a guarantee that there would be less change in terms of the quality of financial advice? Will the charges be capped at some point?
Anna Deibel-Jung: The framework for financial advisers’ qualifications, the changes and the charges are all within the FCA rules, so it is not something that the Government have direct control over—it is something that the independent regulator looks after. The witness this morning spoke a bit about what the FCA has done there. What is important for us in terms of designing guidance is making sure that consumers understand the charging structure and can work out which adviser would suit them and would serve their needs in terms of the size of their pension pot or their wider financial circumstances. Finally, the FCA published a paper in June on advice and how to help the advice sector move forward. We particularly looked at things like online advice and different models from the traditional face-to-face advice sector. That has been well received, as was mentioned this morning. That is a really important development for the market.