This morning's (January 18) report from the committee, 'Protecting pension savers—five years on from the Pension Freedoms: Accessing pension savings', recommended a number of areas where savers need more support with their pensions.
It suggested that by focusing on people's behaviour rather than the pension pot itself, it would be easier to help savers make better decisions.
For example it made recommendations to increase the take up of guidance by automatically enrolling people in Pension Wise sessions and splitting out tax-free cash access so that people have to think harder about what to do with the remainder of their pension.
The committee pointed out that the government needed better data on how the freedoms are actually operating, as currently data only shows how many pots have been accessed and how much money taken out. This revealed little about whether the right decisions have been made, it said.
Ros Altmann, former pensions minister, agreed. She said: “If people have many pension pots and are just taking money from part of their savings, that is not of concern and is what the freedoms were meant to facilitate.
“But if people are cashing in their entire retirement savings, paying large amounts of tax and either spending the money straight away or just putting it in the bank or other investment accounts, then they are clearly not making the most of the freedoms. This type of information is vital.”
The committee has reiterated previous calls for the government to improve its monitoring and reporting on the progress of freedoms and said the DWP and Treasury should jointly produce an annual assessment of measures.
This should also include several of the recommendations the committee has made in its report around support, usage of Pension Wise and policy development.
Here is what the committee said needed to change:
Pension Wise
It has been a long-running issue that the take up of guidance from Pension Wise is too low with various recommendations of what can be done to improve this.
For example, in a government-backed report published in November, the Money and Pensions Service was urged to look into how commercial companies could be used to deliver Pension Wise guidance.
But there is no agreement on what usage levels should be as the committee said it is “clearly unrealistic to expect Pension Wise usage to be universal” as some people would have already taken advice or had an earlier appointment for guidance.
Plans for the DWP and FCA to implement “stronger nudges” towards guidance alone will not be enough to make receiving pensions guidance the norm, the MPs added.
They suggested the industry should trial automatic Pension Wise appointments despite some providers and ministers having reservations about this.
Stephen Lowe, group communications director at Just Group, said automatically enrolling people into a pension has been a success so it would be logical to run trials to see whether it could boost Pension Wise usage.
Lowe said: “This is the one big idea on the table so we are pleased the committee is pushing for this more active approach to be piloted and is also calling for the government to set clear targets for take-up of guidance and advice.
“The government carried out trials before deciding on its ‘stronger nudge’ plans which are due to be implemented in occupational schemes later this year, so there appears to be little to stop them trialling automatic appointments if they are serious about increasing use.
“Unless you run the trials, you will never get the data to see if it will work.”
Decoupling tax-free cash
The committee heard how bad decisions can be made by savers as they are too focused on accessing their tax-free cash without having much thought about what to do with the rest of their pot.
Under current pension rules, people can take up to 25 per cent of their pension as a tax-free lump sum with income tax being payable on the remaining 75 per cent.
The committee heard arguments both for and against decoupling the 25 per cent from the rest of the pot but settled on a recommendation to do so.
LCP was one of the firms that welcomed the recommendation and called on the government to undertake the necessary research as a matter of urgency.
Laura Myers, partner at LCP, said the problem was too little attention was given to what happens to the 75 per cent after the tax free amount is withdrawn.
Myers said: “Decoupling taking tax free cash from accessing the rest of the pension pot would help savers make much better use of their hard-earned savings. I’m delighted to see that the select committee has responded positively to this suggestion and call on the government to do the necessary work to see how this change could be implemented in practice.”
The committee said the regulators should assess whether decoupling was an option by carrying out a scoping exercise to establish the research and testing which could be undertaken.
But Jon Greer, head of retirement policy at Quilter, warned the move would add more complexity to an already intricate pension tax system, given it would require ring-fencing of fund rights.
He said: "Instead of adding more rules, the government could explore whether product innovation could achieve the same goal.
“At least when you access your tax free cash you then have to think about where the remainder of your pot is invested, which drives engagement. We can’t on the one hand try to boost engagement through Pension Wise appointments and on the other reduce engagement by decoupling the tax free cash.”
Pension dashboards
Pensions dashboards will allow people to see all of their pensions on a digital platform, which has “the potential to be the most influential policy in helping people take good decisions when they first access their pension pots”, the MPs said.
But the committee warned these dashboards must be properly resourced to get implementation right and ensure the data is accurate.
It suggested that no consideration should be given to allowing transactions through dashboards until they are well established and that the Money and Pensions Service should come up with a guidance service to support savers by using the data available through pensions dashboards.
Tom Selby, head of retirement policy at AJ Bell, welcomed the committee’s recommendation saying it would ensure the project remained focused on its core purpose.
“It is possible that official guidance services currently available to savers could be enriched by using data available on dashboards,” Selby said.
“However, using people’s information in this way could potentially push guidance providers closer to inadvertently providing regulated advice. It would therefore likely need to be accompanied by a proper review of the advice/guidance boundary to provide clarity.”
amy.austin@ft.com
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