PensionsSep 30 2022

MPs call for update on advice-guidance boundary by spring 2023

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MPs call for update on advice-guidance boundary by spring 2023

The Work and Pensions Committee has called on the government and the Financial Conduct Authority to report their progress in clarifying the boundary between advice and guidance by March 2023.

The committee’s report on savings for later life, part of its inquiry on the impact of the pension freedoms, said it had heard concerns about stepping over the boundary from guidance into advice continuing to constrain the support that pension schemes and employers can provide to savers. 

According to the report, the regulators are working with pension schemes and providers to better understand these concerns and to gather practical examples of where this is causing a problem.

Earlier this week (September 27), the FCA’s executive director Sarah Pritchard said the regulator will make sure that it does what is best for the UK, retaining market integrity and protecting consumers and will carry out a review of the advice-guidance boundaries.

Elsewhere, the report called on the government to introduce auto-enrolment reforms next spring, while setting up new policy goals to ensure a “new consensus on adequate retirement income” is achieved.

In addition, it made a series of recommendations to boost minimum pension contributions, while detailing policies to improve self-employed and gig economy workers’ savings, as it concluded that “more than 60 per cent of people are at risk of missing out on an adequate standard of living in retirement”.

Published on September 30, the report cited research from the Pensions Policy Institute, which showed that only 39 per cent of households and 37 per cent of individuals are on track for an adequate pension, according to the definition used by the Pensions Commission.

With many struggling through a cost of living crisis, now is not the time to ask people to find extra money for their pensions. Sir Stephen Timms, Work and Pensions Committee

The MPs also noted that savers in their forties and above “are most at risk if they do not have access to a defined benefit pension, as they have had limited time to build up a pension through auto-enrolment”.

Work and Pensions Committee chair Sir Stephen Timms said: “While automatic enrolment has been successful in boosting participation in workplace pension saving, many people will be feeling a false sense of security holding on to the idea that putting away the minimum amount will be enough to enjoy a fulfilling retirement.

“The blunt truth is that many employees need to save more but do not realise it. The government must urgently consider how to boost saving, including examining the case for increasing minimum contributions, before it is too late.”

After analysing the evidence received, the MPs noted that there are two measures currently used to calculate pensions adequacy — the Pensions Commission’s target replacement rates and the Pensions and Lifetime Savings Association’s retirement living standards.

“There is no consensus on a single definition or on what outcomes the pensions system should be designed to achieve,” the report noted.

As a result, the MPs are calling on the government to set out its plans by March 2023 to “build a new consensus on adequate retirement income and what the pensions system should be designed to achieve”.

Start planning for contributions increase

In relation to the 2017 auto-enrolment review, in which the government committed to make policy changes by the mid-2020s, the MPs stated that “it is disappointing that five years on we have seen no implementation plan or impact assessment”.

Currently, auto-enrolment rules dictate that employers must enrol into a pension scheme any staff aged between 22 up to the state pension age, and earning more than £10,000 a year. There is also a £6,240 lower earnings limit, which is the threshold that allows employees to qualify for certain state benefits, including the basic state pension.

In its 2017 auto-enrolment review, the Department for Work and Pensions proposed auto-enrolling workers from the age of 18 and abolishing the low-earnings threshold.

“There is almost universal support for these recommendations, which would improve retirement outcomes for many part-time workers, disproportionately women, and for workers in the gig economy,” the committee said.

Considering that, according to former pensions minister Guy Opperman, there is a bill ready to make these changes, the MPs recommended that “government introduce the necessary legislation no later than the beginning of the next session of parliament”, expected to start in spring 2023.

The government must urgently consider how to boost saving, including examining the case for increasing minimum contributions, before it is too lateSir Stephen Timms, Work and Pensions Committee

“It must also publish a timetable for consultation on implementation, taking account of cost pressures on employers and workers,” the report added.

Several pension specialists have called on the government to introduce auto-enrolment reforms, with the Association of British Insurers recently setting a roadmap to increase minimum auto-enrolment contributions to 12 per cent by 2031.

However, the committee considered the current cost of living crisis, noting that now “is not the time to ask people to pay more into their pension”.

“However, if they are to do so in future, work to prepare the ground needs to start now to build consensus on the need for change,” the report stated.

Hence, the MPs are calling on the government to detail if an increase in minimum contributions is possible in the foreseeable future. If not, it “should explain how it intends to address the challenge of many people being on course for retirement incomes” that will not be adequate.

Action needed for self-employed and gig economy workers

On self-employed workers, the committee urged the government to move forward with a plan to increase pension saving in this group, with only 16 per cent of these individuals actively contributing into a pension scheme.

The MPs favoured an auto-enrolment approach for these workers and were “disappointed to hear that HM Treasury has ‘no current plans’” to introduce such a facility through tax assessments.

As a result, the committee has recommended that the DWP and the Treasury set a date to trial ways to default self-employed people into pension saving and consult on the proposal to increase national insurance paid by these individuals, giving them the option to have these additional contributions paid into a pension, if they also contribute.

In relation to gig economy workers, the MPs are “concerned” that individuals are “missing out on their right to build up a pension through auto-enrolment because the company they work for classes them as self-employed”.

The committee heard from the Pensions Regulator, which is facing “legal complexities and routine challenges from employers” in this area, despite new guidance on employment status issued in July 2022 by the Department for Business Energy and Industrial Strategy.

The MPs are thus recommending the government to “bring forward its employment bill for parliamentary scrutiny as soon as possible, to increase the legal protection available to people in low-paid work and the gig economy”.

In the meantime, the DWP should work with the regulator “to estimate the extent of the problem and what additional resources or powers TPR needs to be able to ensure employers in the sector comply with their auto-enrolment duties”, the report added.

New office for pension objectives

After identifying the challenges faced by current savers, the committee concluded there is “a need to forge a consensus on the future direction, including employers, trade unions, the pensions industry and the wider public”, which should be achieved through “cross-government commitment to develop a plan and build this consensus”.

Stopping short of recommending a new pensions commission is set up, the MPs urged the government to set up a new office tasked with building and maintaining an evidence base, which is needed in areas such as self-employed and pension sharing in divorce.

This office should also be in charge of “explaining the trade-offs involved in different policies”, and “reporting regularly to parliament on progress in meeting objectives, in particular relating to retirement adequacy and the gender pensions gap”.

Timms said: “With many struggling through a cost of living crisis, now is not the time to ask people to find extra money for their pensions, but this does not mean that the new team of DWP ministers can sit on their hands and ignore the dark clouds gathering on the horizon for a future generation of pensioners.

“Without action to prepare the ground now, many people will feel the reality of this coming catastrophe in their later years.”

maria.espadinha@ft.com, amy.austin@ft.com