The difference of opinion between the DWP and the Work and Pension Select Committee over the promotion of Pension Wise is significant both at the policy and practical level (policy does not always translate to practice).
You can read an extensive article on the matter in Pension Expert, but I will summarise
Stephen Timms and the WPC wanted Pension Wise appointments to be made automatically for people approaching the point where they wanted to consider what to do with their pension savings and the DWP said “no”. This leaves the “stronger nudge as the DWP’s tactic to improve take up of the free guidance.
Stephen Timms and the WPC wanted to give Pension Wise a target of seeing 60% of its available audience, the DPW said “no”. The DWP argued that you couldn’t second guess what people were going to do , the industry suggested that Pension Wise would not be resourced for this.
The question that no-one is asking is “is this a vote of no confidence in Pension Wise and MaPS from the DWP and in particular the Pensions Minister. I am quite sure that Guy Opperman would say it wasn’t but many think it is. Pension Wise is like a sacred cow that cannot be criticised but whose virtue is given rather than realised.
If Pension Wise was to be judged by outcomes, it would need to be judged by the FCA’s retirement income survey. On that basis, there is so little consistency or sense in the way we are accessing our pension pots, to suggest that Pension Wise is not working. Whether people who have been to Pension Wise appointments make better decisions is yet to be proven, but that most people accessing their pots are neither going to Pension Wise or taking advice suggests that the system is not working at any level.
Another way of looking at the problem of choice.
What we know works is defaults and opt-outs. People will generally accept decisions made on their behalf when it comes to retirement planning. People will accept contributions being taken out of their salary, will accept the choice of workplace pension, will accept the fund into which they are defaulted and will accept that the money in their pot is locked away to their minimum normal retirement age (known to be 55 and increasingly understood to be later than that in years to come). Those who opt-out are fairly consistently around 10% of savers and they include the mega-pensioned with LTA issues, those who are conscientious objectors (perhaps on religious or ethical grounds) as well as those for whom saving doesn’t make sense.
Were the Government to introduce a default means by which people got their savings back, it would be entirely consistent with what has worked so far. We do not need guidance or advice to build up a savings pot, why should we need such things when we come to have it back as a pension?
And here is the second big challenge from WPC as they come to the end of
Protecting pension savers–five years on from the pension freedoms: Accessing pension savings
We have the DWP’s response and await the Financial Conduct Authority response to the Committee’s Fifth Report. In particular I am waiting for the FCAs response to the recommendation posed on CDC.
We recommend that the Financial Conduct Authority consider whether there is also a case for developing contract-based CDC schemes and publish its findings.
My view
The evidence from Tom McPhail’s review of Pension Wise is that it provides an admired service by those who use it , but not enough people use it and there’s too little evidence to know whether those who use it, make better decisions because of it.
As with their rejection of the decoupling of the Pension Tax Free Cash Lump Sum, the DWP are making it clear that they want people to treat their workplace pension as a pension.
Without a clear way of doing this, people will continue to flounder with pension freedoms as they are doing now.
We are not hearing the dissatisfaction of ordinary people with what is being offered but low take up rates of Pension Wise and the paucity of pots that are being drawn down in a sustainable way suggests that people are not clear about what they are supposed to be doing.
As in Australia, where the Retirement Income Covenant will, from July, require those operating workplace pensions to offer a clear plan for savers stopping saving and starting spending. That approach is also needed here.
The investment pathways is a start but it is not enough, auto-enrolment tells us that people, while valuing the choice to do something else, want a single pathway which they can take if they cannot choose.
In my view, that pathway is a pension. We have rejected annuities as generally not fit for the purpose , we have found drawdown very hard, the time is right for a new default to emerge, that should be the Plan B.
Pension Wise may or may not work, if it does , it will mean we have a reformed market that returns the nation to using pension pots to pay a wage in retirement. But if Pension Wise continues to fail in that endeavor, we need a default – I think that the contract based CDC plan (aka a retail CDC fund) is Plan B.
Pension Wise could (an in my opinion should) become a way of explaining how workplace pension pots turn into pensions. But it will need a better product than the investment pathways, none of which look good enough and it will need a product that is equally useful whether the pot is from a personal pension or a trust based scheme.
Dear Henry
I am so sorry but I really don’t understand why you are constantly dismissing PensionWise as inadequate, rather than helping more people to use it.
It is the only source of independent guidance we have, it was set up with extensive training and with ordinary people in mind, those who use it are really satisfied and many make good decisions about what to – or Not to – do with their pension pots. If they go anywhere else for guidance, the likelihood is that they will be told to do something, when, if they are still working, still in their 50s or early 60s, if they have other pension pots or DB pensions elsewhere, actually the much better thing to do is stay invested, keep adding more and don’t touch the pension till they’ve spent other savings like ISAs. This is not the kind of discussion they would have with a commercial guidance provider who clearly will have a vested interested in them doing ‘something’, rather than just going away and saying thanks so much I will do nothing for the next few years.
This is a message that the pensions industry, for some reason that is hard to fathom from a customer perspective, has failed to get across. Partly maybe it’s because they make more money from selling a drawdown or annuity product perhaps? I am not sure? But the whole industry has for too long been reliant on consumer inertia – the poor dears aren’t savvy enough to understand their pensions or make informed decisions – so they must rely on whatever is given to them! This has not been good for customers. Annuity sales were disastrous for so many who bought the wrong annuity (single life, level) and died to regret it if they were in poor health or hadn’t covered a spouse without realising what ‘single life’ meant because nobody explained it and the blanket messages were all about getting the ‘best rate’ rather than doing the best thing with their money for the rest of their and their partner’s life. Old style drawdown also worked poorly in terms of consumer charging and the industry has never been set up for D2C communications, so it relies on middle’men’ to distribute their products, or on Government to mandate people to give them money from the general public.
Unless we ensure that the indepenent and very worthwhile PensionWise service is ramped up to help the majority of people make better decisions, they will remain at the mercy of the products that the pensions industry deems are ‘best’ for them, without knowing their circumstances, without helping them decide for themselves with independent unbiased information and is likely to just repeat the problems that have plagued pensions for so long. CDC may be suitable for some, but others are best to keep their money untouched till their 70s or later. Some could benefit from a pot that just pays a simple rule payout, e.g. 3% or 4% a year but the remaining money is invested for the long-term. Others may be safe with an annuity once they reach a later age, or if they are already in poorer health and are buying from the right mortality pool. Annuities without inflation protection and spouse cover are not suitable for the majority, yet that is what the pensions industry deemed to be ‘best’ as the no decision option or mandatory option.
People need to be helped to understand, not told that they don’t need to bother worrying about what products there are or how to decide what is right for their own circumstances. I believe we could do better in the 21st century and that PensionWise guidance could help people in ways that default options or commercial guidance provision cannot. Of course the best is often to have expert independent paid-for advice, but that is an entirely different conversation!
Pensionwise is inadequate, for many, because it’s not allowed to do the job properly. In particular, if you have low pension savings then it doesn’t help to be told “there may be an impact on state benefits” when it would be quick and easy to tell someone “if you take £x in capital or £y in income then your benefits would be reduced by £z”. There’s no product involved, so no need for regulated advice to do this. Pensionwise is not allowed to give the numbers that people need to understand the bottom-line options that they have.
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