Chancellor George Osborne faced a grilling from the Treasury select committee yesterday on the impact of his pensions revolution.
At last month’s Budget, the Chancellor said over-55s could take their entire pension pot as cash from next April.
He also said over-55s in defined contribution schemes would be guaranteed free, impartial and face-to-face guidance. Budget documents later clarified the service provided would be guidance, not advice.
MPs quizzed Osborne on how his proposals would impact house prices, infrastructure investment and his relationship with the FCA.
Labour MP Teresa Pearce and Conservative MP David Ruffley both asked Osborne how the changes could affect house prices.
Property experts have predicted pension pots could pour into buy-to-let and act as “rocket fuel” for the housing market.
Osborne said: “The impact of buy-to-let historically, although we don’t know about the future, has been limited on house prices. I don’t think it would be a reason not to go ahead with pensions flexibility.
“We have a body in the financial policy committee with the tools and responsibility to deal with mortgage standards and levels of debt. Our responsibility is to look after people who have worked hard and saved hard.”
Defined benefit transfers
The Government has banned transfers out of public sector defined benefit schemes to stop a mass exit and is consulting on a similar ban for private sector schemes.
Pensions minister Steve Webb has hinted he favours allowing transfers out of private DB schemes but Osborne stressed the uncertainty around the move.
Pressed on whether infrastucture investment from pension funds would drop if there are big pension fund outflows, Osborne said he had assurances it would not and highlighted the crucial money in DB schemes.
He said: “A big part of what we need to do is look at what we do with freedom and flexibilities in defined benefit schemes. There is a very large sum of money invested in corporate bonds as well as gilts.
“It’s something we are open to views but have not made a judgement on. That is where a huge amount of the institutional money is tied up.”
FCA annuities review
The FCA has reduced the demands on insurers to respond to its market study of the annuities market after the Association of British Insurers called for a rethink.
There is confusion about when the FCA found out about the bombshell pension changes on Budget day and the impact on its annuities review.
Osborne said: “I am not pulling the plug on the review. The leadership of The FCA were supportive of the pension proposals in advance of the Budget when we talked about it. I suspect one of the reasons they are supportive is the current annuity market does not provide value for money.”
Osborne said there is still a crucial need for the FCA’s annuity review as he expects many people to still buy them despite predictions the market could shrink by 90 per cent.
He said: “Annuities will be the right product for many people after these reforms, they are just not right for everyone. People will want the certainty annuities can provide. I hope the changes we have made will lead to more competition in the annuity market and potentially more flexible annuity products.”
Advice v guidance
Advisers attacked Osborne for “misleading” remarks when he claimed the guidance service for over-55s was a “right to advice”.
Yesterday, he dismissed any concern and said he needed to “communicate in English” and the difference between guidance and advice was a technicality.
Labour MP Pat McFadden also pressed the Chancellor on the costs of the guidance regime as the Government has only committed a £20m development fund so far.
Osborne said: “I have not been prescriptive except to say it will be free at the point of use so costs will be incurred by the industry as a part of doing business. The costs will be more than outweighed by the benefits to the industry, which will lead to more innovation form flexibility and also the changes to Isas.”
Long-term care funding
Care experts have warned the pension changes have “major implications” for long-term care funding.
Osborne agrees and says he will change the rules around social care funding – only just being created through the Care Bill – to make sure the changes do not have an impact.
He said: “I have made it very clear we have to change the social care means test rules to take into account the new pension arrangements.”