‘With pension power comes responsibility’

interactive investor comments on Work and Pensions Committee report.

The Work and Pensions Committee this morning published a 73-page report “Protecting pension savers – five years on from the Pension Freedoms: Accessing pension savings”.

The report covers a wide range of areas, following a number of changes to pensions by the government since the introduction of Pension Freedoms.

Overall, the committee supports the government’s intentions to make pensions simpler but suggests that recent changes, such as the increase to the Normal Minimum Pension Age, have had the opposite effect.

It added that “simplicity alone is not enough to improve outcomes for savers” adding that the government needs to “increase saver engagement, encouraging and enabling people to make their own decisions, or take a more interventionist approach with passive savers to ensure that they do not default to a decision against their best interests.”

The report makes several recommendations including to:

• Introduce an annual review of progress on pension freedoms to evaluate their success
• Introduce a goal for use of Pension Wise and paid-for advice
• Ensure that future changes to, for example, normal minimum pension ages, “do not bake additional complexity into the system for decades to come”
• Develop proposals to increase the number of people choosing a mix of retirement products to suit their life stage
• Further develop plans for a midlife MOT
• Conduct a full review of the Pension Advice Allowance
• Adapt or drop plans for a pension statement season, as the benefits are not clear
• Boost development of Collective Defined Contribution schemes
• For the Pensions Regulator and the Financial Conduct Authority to consult together to avoid differing regimes for different types of pension
• Not allow transactions through dashboards until they are well established. Instead introduce a guidance service for people using the dashboards.

Becky O’Connor, Head of Pensions and Savings, interactive investor, said: “Pension freedoms mean people now have power over their own pensions, whether they want it or not. With that power comes responsibility, but the fate of their own retirement savings is a lot for individuals, who many not be used to making big decisions with huge pots of money, to take on.

“Pension options at retirement are massively complicated and in the absence of affordable advice, people can become anxious under this new burden of responsibility for their own choices and the fear they could make the wrong ones. It’s not surprising so many retreat to the safety of ‘cash first’, which comes with its own risks, particularly in times of high inflation.

“This report supports the government’s emphasis on simplicity but suggests it now needs to go further and shift the focus on to boosting engagement. We can no longer brush aside the existing lack of engagement among pension savers with the traditional blanket response that ‘people just find pensions boring’, because the stakes are too high.

“interactive investor’s own research suggests a significant knowledge deficit about our own retirement savings. For example, 48% of people don’t know what the charges are on their pension. This lack of awareness is astonishing when you consider the value of a retirement pot, but we can’t blame savers for this. The industry needs to work harder to get that engagement and not be afraid to involve people in their pensions.

“It’s true that some people may prefer not to engage at all and the committee is right to call out that a different approach is needed for this perennially disengaged and disinterested cohort, but the general approach should be to try to engage everyone more.

“Engaging pension savers is a totally new way of thinking and could take time to get right. The lack of engagement is a legacy of the defined benefit pension world, when pensions were done to you and you didn’t really need to be engaged in anything – you just got what you were given. But this lack of engagement is not fit for a defined contribution world, post-pension freedoms and often in the absence of affordable advice, where pensions have to be done ‘by’ us.”