MPs have called for a new form of standardised drawdown to protect pension savers and have said providers should be forced to offer the product.
In its final report on the pension freedom reforms, published today (5 April), the work and pensions select committee recognised the danger posed by the 'advice gap' and said savers needed more support in both accumulation and decumulation.
It said the introduction of a default decumulation pathway alongside a fully functioning pension dashboard could address both.
The committee called on the government to allow Nest, the government-backed defined contribution (DC) pension scheme established to support automatic enrolment, to offer decumulation products.
But it also wanted to mandate providers active in the drawdown market to offer a default decumulation pathway suitable for their core customer group by April 2019.
Frank Field (pictured), the committee's chairman, said: "Automatic enrolment has been a runaway success, bringing millions of people on board in saving for their retirement.
"We want to expand that success story so that everyone, no matter how they are saving, has a simple, suitable, default pension option, with a low, capped fee.
"From that solid base, those who want to choose other options would retain complete freedom to do so. They would be armed with a new range of clear, transparent information in making their choices [stemming from the pensions dashboard]."
The product would be overseen by existing independent governance committees and subject to the same 0.75 per cent charge cap already in place for accumulation in automatic enrolment.
The MPs said the shake-up would create better consumer protection as well as a "properly functioning pension freedom market" as better-informed customers switch providers and demand cost-effective products.
Sir Steven Webb, a former pensions minister who is now director of policy at Royal London said the recommendations would "destroy the spirit of pension freedoms".
He said: "The whole reason for giving people ‘freedom and choice’ at retirement is that everyone has different circumstances, needs and objectives.
"It would be impossible for an individual pension provider or scheme to know what was the best option for a saver when they know nothing about [their] other pensions."
Nathan Long, senior pension analyst at Hargreaves Lansdown, said the proposals were akin to “tailoring a retirement straight jacket” and would not tackle the problem of people running out of money in later life.
He said: “The word default should be banished from the decisions made at retirement, as hugely personal choices don’t lend themselves to a one-size-fits all approach.
“It is important to inject a healthy dose of realism into these decisions, as drawing more than the income naturally produced by your investments puts you at the greatest risk of running out of money in retirement.”
Default decumulation options were already proposed by the Financial Conduct Authority in its Retirement Outcomes Interim Review out in July 2017.
In its paper the regulator envisaged a system where providers would be required to offer at least one default pathway with a high-level objective and a strategy set out to achieve this.
The firm would ask the consumer to express their desired retirement outcome and then offer them the default pathway which most closely matches their retirement choice.
Firms would actively review the appropriateness of the default investment pathways to ensure they remain appropriate for their customers. If their retirement choice changes, they may need to switch into another investment pathway, the FCA stated.
Stephen Barclay, then Economic Secretary to the Treasury, told the Work and Pensions Committee the government was actively considering this approach.
But he cautioned there was a danger of defaulting individuals into unsuitable products.
Another former pensions minister, Baroness Altmann, said the committee was right to recommend providers should design good value standardised options for people who can't make their own investment choices.
She said: "Given the lack of competition, providers have not felt pressure to innovate at the withdrawal phase of pension saving. They have stuck to the old drawdown products, which are often expensive and require customers to choose their own investments.
"Of course, in an ideal world, one would want everyone to make their own choices, but investments and pensions are complicated concepts and having a recommended pathway can help people manage their money more effectively through their later years."
She also endorsed widening the role of Nest to the decumulation market.
"Allowing Nest to introduce its own standardised drawdown products by April 2019, with controls on the charges, would force more firms to innovate, or face losing customers to Nest's better value options," Baroness Altmann said.
The committee also called for a centralised pension dashboard, saying the case for multiple dashboards hosted by "self-interested providers" was "far less convincing" as it would add more complexity where simplicity was needed.
The MPs acknowledged the existence of the advice gap and the positive effect advice has historically had on people's savings. They also recognised the potential benefits in offering cheaper forms of automated advice.
They recommended the FCA carry out a review comparing automated and face to face advice.
Mr Long endorsed the committee's openness to new forms of technology but he criticised its negative stance on having multiple dashboards.
He said: "Technology is rightly flagged as having a role to play when improving retirements, but the report pushes its use in providing financial advice, yet is less keen when it comes to opening up our pension data across multiple pension dashboards.
"Open banking has put people firmly in control of elements of their own finances, yet pensions are not seemingly being treated with the same urgency. People will struggle to make confident retirement planning decisions without innovation."
Yvonne Braun, director of policy at the Association of British Insurers, said a single dashboard would be a "huge missed opportunity".
She said: “It may be that an initial publicly hosted service is a pragmatic place to start given the stated aim to deliver a dashboard in 2019.
"But it would be a huge missed opportunity if we adopt a single dashboard as the final destination. We know that people expect to be able to use sophisticated dashboards in the future, integrated with other services, that only the private sector will be able to provide.”
carmen.reichman@ft.com
