My Lords, many of the problems faced by our pensions system are to do with drawdown and transfer, some of which we have just discussed. This amendment would introduce a cooling-off period to help to reduce these problems and increase the frequency of taking independent financial advice and Pension Wise guidance.
The FCA recently surveyed our pensions landscape in its excellent Sector Views, published two weeks ago. The introduction noted:
“Key issues causing consumer harm include unsuitable advice, the sale of unsuitable products, poor value across the value chain and pension scams.”
The gravity of these things led the regulator to conclude:
“From a wider perspective, the prospect that consumers may not get a retirement income that meets their needs or expectations remains the central challenge.”
This is entirely appropriate, given the scale of consumer harm.
The review estimates that unsuitable transfers out of DB schemes could collectively result in losses of up to £20 billion-worth of guarantees over five years, that consumers making unsuitable product choices in retirement could also collectively lose £20 billion from unsuitable investment strategies over five years, and that more than 15 million consumers of NWP pensions and retirement income products could be affected by poor value pension products. The compound effect of high charges could lead to consumer benefits being reduced by more than £40 billion over five years.
All this is worrying enough, but on top of this, there are the scams. Consumers who are scammed lose, on average, 22 years’ worth of pension savings. That is around £82,000 each. There are also warnings for the future from Australia’s more mature DC market. There we see that economies of scale are not being passed on to consumers and that poorly governed investments in alternative asset classes are leading to lower returns. There are also higher costs associated with the proliferation of small pots, created each time a worker moves jobs.
All these factors are at play now in the UK, and we have special factors of our own to contend with. For example, the FCA has found that 29% of pension transfer advice was unsuitable and that 23% was unclear— or, to put that another way, more than 50% of transfer advice was unsatisfactory. The FCA planned to write to 1,841 financial advisers about potential harm in their DB transfer advice. That is 76% of all advising firms—a truly alarming development and an unacceptably large number.
The problem with bad advice is a present and clear danger; so is the problem with unadvised and unguided drawdowns and transfers. Since we last addressed this problem in the Financial Guidance and Claims Bill, FCA data suggests that more than 645,000 people have accessed their pensions. Of these, only a tiny 15% are believed to have had a Pension Wise appointment before accessing their benefits. More than half of the pensions accessed by savers for the first time between April 2018 and March 2019 saw the saver withdraw the maximum amount. Perhaps even more worryingly, the FCA’s latest data shows that for retirees taking a regular income from their pensions, 40% were taking out cash at an unsustainably high withdrawal rate of 8%-plus. This 40% rises to 63% for those with funds of less than £50,000. That is the road to destitution.
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All this is extremely worrying. It is true that the FCA and the Government are addressing some aspects of the problems. In January last year, the FCA announced a consultation on investment pathways, “wake-up” packs and disclosure of charges. It is to be commended for these initiatives and its determination to press ahead, but timing is the problem. When will we see any of this in the marketplace? How long will we have to wait as harm continues?
The Government have been active too. In line with the provisions of the Financial Guidance and Claims Act 2018, MaPS has in the field two pilot nudge programmes designed to make consumers more likely to seek advice or guidance. I understand that the results of these trials, or the latest news, are expected in the summer; that might run until next April, of course. In other words, there does not seem to be much prospect of any relief before mid-2021 at the very earliest. Moreover, there is the possibility that the MaPS nudge trials might fail, and that the investment pathway process might also fail or its implementation be delayed.
I mention these measures not only to give credit where it is due but because I expect the Government to use them to suggest that the amendment is unnecessary. Amendment 79 introduces a cooling-off period of 60 days between a member requesting drawdown or transfer and that drawdown or transfer taking place. It provides for three ways in which this 60-day moratorium can be waived. The first is by the provision of relevant independent financial advice from an authorised or regulated financial adviser. The second is by answering approved questions, demonstrating detailed knowledge of the scheme to which rights are being transferred and specifying whether the requested transfer originated in unsolicited communications. The third way of waiving the 60-day moratorium is by showing that the member has received guidance from Pension Wise.
I am not arguing that the amendment or something like it will solve the problems of ill-judged drawdowns or transfers; I am arguing that the amendment will help. We all know that Pension Wise satisfaction rates stand at 95%. I am also arguing that the amendment will help soon—as soon as this Bill becomes law, probably before the summer and certainly long before the FCA’s proposals see the light of day and before the MaPS nudges are in place. I beg to move.