Rewriting the freedoms: Labour eyes regulation to strangle Osborne’s pension reforms

Jeremy Corbyn’s Labour party looks set to roll back key facets of the pension freedoms if it wins power in the 2020 general election.

This week saw the long-awaited arrival of the Independent Review of Retirement Income from Cass Business School’s Professor David Blake, commissioned by former Labour shadow work and pensions secretary Rachel Reeves almost two years ago.

The report sees Blake set out the need for a “national narrative” on pensions, and raises fears that a disconnect between the inertia of auto-enrolment and the involvement required by freedom and choice is leaving savers exposed.

However, experts say the report’s key recommendations – including a decumulation charge cap, reclassifying drawdown as “risky” and nudging savers towards “safe harbour” products with guarantees – amount to a reversal of Chancellor George Osborne’s radical reform agenda.

Retrograde step?

The report’s main suggestions include the creation of regulator-approved safe harbour products which offer advisers protection against future liability, while also meeting agreed standards.

These standards would include references to accessibility, inflation protection and longevity protection.

Safe harbour products would also have to meet agreed levels of transparency, while also being able to demonstrate value for money.

Blake’s proposals also include a new “high risk” categorisation for pension products that do not include elements of longevity insurance.

Although high-risk products can be sold on a non-advised basis, firms doing so need to be able to prove they are suitable for clients.

And in extreme cases, such as contingent convertible securities, the FCA has acted to restrict the sale of high-risk products to certain classes of investors.

While safe harbour products would need to be chosen by savers, Blake refers to them as “quasi- default” options which can be offered after a decision tree process.

Tisa policy strategy director Adrian Boulding says the approach is indicative of a fundamentally different political philosophy within the Labour party.

He says: “The Conservatives say it is people’s money so they can do what they want, but Labour is arguing this money is a one-off that employees and employers have built up so it needs to be spent carefully, and people need help spending it.

“Obviously, with many kinds of drawdown plan you can run out of money, but what Professor Blake hasn’t addressed is whether that is necessarily a good thing or a bad thing. If you have a modest pension pot, then the question is do you want to stretch that pot out across 20-35 years of your remaining life, or do you want to consolidate that spend in the early years of your retirement when you are physically and mentally more active?

“Freedom and choice allows people to make those decisions and ask whether they want to maybe live on the state pension. It’s not much, but it might make sense if you only have modest savings.

“Blake is trying to move the pendulum too far back. He’s saying ‘let’s stop people from doing silly things’, but ordinary people might make good decisions if they’re allowed to do it.”

LV= head of policy Philip Brown adds: “Safe harbours risk being seen as a way for firms to deliver poor outcomes for consumers without offering protection. This is likely to further damage trust in this market and put people off taking advice at the time they need it most.”

Aegon head of pensions Kate Smith argues any move towards default options will undermine efforts to get savers to engage with their pensions.

She says: “This just seems to be giving up on engagement.

“Any pensions agenda has to be about engagement and getting people to think about what they want to achieve, but it should be totally up to you to decide how and what you want to do.”

Blake also recommends the introduction of a decumulation charge cap, which would include any fees paid for platforms or advice.

But Smith warns such a move risks stifling innovation. She adds: “The drawdown market is incredibly diverse so it’s very difficult to just put a charge cap on that and expect all those things can still be offered and individuals can still be helped.”

Blake’s backers

At the same time, Blake’s co-author Debbie Harrison has been keen to avoid accusations of a new paternalism from Labour and the report.

Harrison says the report sought to bring together the conflicting principles of auto-enrolment and pension freedoms.

She says: “A strong nudge isn’t telling people what to do, it’s saying ‘this is what we think might work for you if you don’t want to make a decision yourself’.

“Provided people have an opt-out, then to be defaulted or nudged into some sort of collective large scale, well-governed, low-cost default choice that meets our criteria doesn’t conflict with freedom and choice.”

Blake adds: “It’s not paternalistic. For people who don’t want to make an active decision, they will end up with a decent product that’s well designed, in the same way that the auto-enrolment sector works with Nest and Now:Pensions.”

Perhaps unsurprisingly, annuity providers are among the firms most supportive of Blake’s findings.

Just Retirement group communications director Stephen Lowe hails Blake’s identification of risks faced by savers entering drawdown without advice.

He says: “Blake rightly reminds us the primary purpose of a pension scheme is to provide an income in retirement for however long the scheme member lives – something too many people have forgotten in the hyperbole of pension freedoms.”

Partnership director of corporate affairs Jim Boyd says Blake “is talking a huge amount of common sense”.

He says: “Not having some form of longevity insurance means unless you are incredibly well advised you are requiring individuals to be able to do a number of things, including assessing risks that even hugely qualified people find very hard to look at.

“We shouldn’t be asking about paternalism, we should be asking about prudence and stopping people from making bad decisions.”

Expert view

Alongside the decline of employer-backed defined benefit schemes, the introduction of pension freedoms represents a massive shift in risk from shared liability between the individual and the employer and the state to a far greater emphasis on the individual, with a less generous state as a distant backstop.

While pension freedom and self-reliance are desirable virtues, so too is the collective support and mutual insurance that come through secure work, decent wages and pensions that allow us to pool risk and share rewards.

That is the debate Labour needs to lead for the country. And the Government has to step beyond its soundbites, treat savers with more respect and be honest about the real challenges they and their pensions will face in the future.

We will begin that debate in earnest with Professor David Blake’s report.

We will set out our principles that we believe need to underpin pensions policy, and we will start from an assumption that it is never enough to ask the individual to fend for themselves.

The Tories may believe you are on your own, but Labour does truly believe in the strength in unity and security in society.

That does not mean reversing the reforms made by the Government. Savers and the industry have told me they need stability right now.

But it may mean revisiting the need for collective saving schemes such as Nest, and  perhaps the invention of successor vehicles.

And it must mean a new honesty about the scale of the challenges we face, a new honesty about the contract between citizen and state, and between the present and future, that our pensions represent.

Angela Raynor is Labour shadow pensions minister

Adviser views

Nick Bamford, executive director, Informed Choice

For advisers, the cost of delivering the service is more of an inhibitor in reaching that market than the liability protection of a safe harbour. But by the time this comes to fruition, things like robo-advice will be more developed and there might be more cost-effective mechanisms to bring advice to market. A combination of safe harbour products delivered using online technology? There is a business model there that could work.

Pete Matthew, managing director, Jacksons Wealth Management

Safe harbour products might sound like a good idea, but there is quite a lot of nuance there. For an adviser, the temptation would be that they can recommend something with impunity. But unless they are going to make more money out of it why would they talk to a consumer about anything else? Also, in a lot of cases people might actually be better off taking a bit more risk and getting more income rather than leaving it after they die. So safe is not always safe, and you could actually jeopardise the financial health of the client.

The Key Recommendations

  • New quasi-default “safe harbour” decumulation products that combine accessibility, inflation protection and longevity insurance
  • A charge cap on drawdown products, including advice and platform fees
  • Allow Nest to compete in the decumulation market to set a benchmark for other providers
  • Immediate annuities to be sold via auction, with the Government further encouraging the development of a deferred annuity market
  • All categories of advice and guidance to be rebranded as either “personal recommendations” or “financial support” so customers have a better understanding of the market
  • A new target of 15 per cent of lifetime earnings for retirement savings
  • The establishment of a permanent Pensions, Savings and Long-Term Care Commission
  • Create a single pensions regulator