Keith Bradley on the need for more adequate testing in the government’s pension reform plans
Later today, Peers will debate government legislation on both the taxation of pensions and pension schemes. The Taxation of Pensions Bill makes changes to the tax regime to allow people to access their pension pots flexibly, while the Pension Schemes Bill allows for the creation of ‘Defined Ambition’ and Collective Defined Contribution (CDC) schemes.
While Labour wants people to be able access their pensions flexibly, three tests must be met. First, that savers get the right guidance. Second, that there’s fairness for low and middle income savers. Third, that reforms don’t lead to additional burdens on the State. We also support the creation of CDC schemes – something we were calling for before the government made its announcement. Today however, we will probe what work has been done to consider how these reforms fit together, and the impact that flexibility will have on the types of shared risk schemes that may emerge.
The Pension Schemes Bill contains the guidance guarantee that will be associated with freedoms and flexibilities. Ministers understand the importance of this guarantee (or whatever it becomes known as) meeting the substantial challenge of equipping people to navigate an at times difficult market. This reflects another tension between the different strands of the reforms. Auto-enrolment is based on the idea that consumers do not always make the best decisions and may end up doing nothing instead. The new freedoms are predicated on those same consumers becoming highly engaged with the decision they face on retiring. The guarantee therefore, is the bridge over which they are attempting to cross that particular fault line and it needs to be up to the job.
There are also some missed opportunities in the government’s plans.
Amongst the excitement of the flexibilities being rolled out next April, we must not forget about reforming those parts of the market that haven’t worked well but which still provide products where this is demand. It would be of real benefit to consumers to require an independent broker’s recommendation before it were possible to sell an annuity to someone who has saved with the scheme they’re purchasing from.
We would also urge the government to act to prevent people who are taking advantage of the new flexibilities being subject to similar examples of consumer detriment (albeit through a different product). It is concerning that plans to address rip-off pensions don’t include income drawdowns, despite the fact that 320,000 people are likely to want to access these products after April. If charges equivalent to many of today’s drawdown products were applied, someone investing a pension pot of £30,000 could lose 27% of their savings to charges. Indeed, as the median annuity in 2013 was purchased with a pot of £20,000, such charges could be very significant.
The Coalition’s proposals are currently more of a framework than fully worked through legislation. A pensions market that protects consumers and provides them with what they need in retirement needs more adequate testing.
Lord Keith Bradley is a member of the Shadow Work and Pensions team in the House of Lords
Published 16th December 2014
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