By now it should go without saying that pensions are one of the most highly politicised subjects you could choose. Pensioners are heavy users of public services, as well as being more inclined to turn out and vote than most other groups. At the same time, Britain has a very low savings rate by international yardsticks, and so worries about the sustainability of the pension system continue to grow. Small wonder, then, that the financial affairs of older generations are the subject of such intense political interest. Since 1997, we have seen massive political intervention in the UK.
Policy on pensionsMany blame the then Chancellor Gordon Brown’s controversial dividend tax change that year for hastening the demise of final salary schemes. Last year, the Office for Budget Responsibility calculated that between July 1997 and 2014, an extra £117.9bn in tax revenues flowed into the Treasury as a result of Brown’s abolition of the dividend tax credit. That is a lot of pension saving that didn’t happen.
More recently, there has been the introduction of the ‘triple lock’, guaranteeing annual rises of 2.5% a year in the value of the state pension (far ahead of wages over the past few years and, if you listen to the gloomier forecasters, rapidly propelling the UK towards bankruptcy if it is not abolished pretty soon). Then last March, in Budget 2014, the Government unveiled the ‘pension freedoms’ that came into force this April. Chancellor George Osborne sprang his surprise reform of the rules on the House of Commons with characteristic flourish: “Pensioners will have complete freedom to draw down as much or as little of their pension pot as they want, anytime they want. No caps. No drawdown limits. Let me be clear: no one will have to buy an annuity.”
Guidance or advice?It’s no surprise that just six months after the pension freedoms became law, the controversy they generated showed no sign of fading. The Work and Pensions Select Committee produced its
Pension freedom guidance and advice: first report of session 2015–2016 in October, warning that the reforms were “endangering savers” because too few people understood the difference between regulated advice and unregulated ‘guidance’ of the sort provided by Pension Wise, the free service set up by the Government to help people work out how to exercise their newfound pension freedoms. The committee makes a valid point. But how hard is that distinction to explain in reality?
I recently heard Henry Tapper, founder of Pension PlayPen, which advises UK companies on workplace pensions, set it out with admirable clarity: “Advice is when we tell you what to do. Guidance is when we set out your options.” Put in those terms, the problem seems eminently surmountable.
Results under fireThere has also been much criticism of the number of people using the Pension Wise service. During the first six months, about 220,000 accessed some or all of their savings under pension freedoms, but just 20,000 received guidance from Pension Wise, whether face-to-face (via the Citizens Advice Bureau) or on the phone (via the Pensions Advisory Service). About 1.5 million visitors accessed the Pension Wise website over the same period. The wide discrepancy between the number of people taking advantage of guidance sessions and those exercising their freedoms is generally taken to show that the Pension Wise service is somehow failing to fulfil its purpose. If so many people are either unaware that they can access it or feel they have no need of it, is not something very wrong?
Maybe, but not necessarily.
Judging successFor a start, the whole exercise in pension freedom was based on the populist proposition that people do not need telling what to do with their own money. Rewind to March 2014, when Osborne ridiculed the “patronising view that pensioners cannot be trusted with their own pension pots”, while the then Chief Secretary to the Treasury, Danny Alexander, added: “It’s a matter for people to choose how they spend their money.” Neither of these declarations implies that making decisions about how to manage your retirement savings is difficult and complex, and that most people need professional help to get it right. Quite the opposite, in fact.
Second, who is to say that 20,000 guidance sessions out of 220,000 represents a failure anyway? Until last April, there was effectively no market in at-retirement pension advice, because most people had no real choice about what to do with their money. The truth is that we have no idea what success should look like at this very early stage, so rushing to judgment is particularly pointless. Instead, take two steps back and look at the situation again.
Britain is on the way to having a free, face-to-face financial guidance service for everyone over 50 who is making plans for their retirement. There is much still to do, as the Financial Advice Market Review makes clear. But there is also the potential for a far better outcome than most of us would have thought possible even a year ago.
The original version of this article was published in the December 2015 print edition of the S&IR.