ONE of the big challenges we face in the area of retirement and pension provision is helping ordinary savers get more for their money.
If we’re asking people to save more, the savings products we offer must offer value for money. That’s why we pushed so hard for reform to the rip-off fees and charges that were eating away at pension savings.
After the Government first dismissed our concerns, then dithered and delayed over whether and when to do anything about it I am pleased to say that we have now wrung from government a commitment to take action, though we still have questions about whether their proposals go far enough to deal with the problem.
Questions remain about whether they will require the transparency needed to make the cap effective, or include the transaction costs that can play such a big part in the erosion of people’s savings.
And while the Government has fixed the cap at 0.75 per cent, we will look at how to bring this down to 0.5 per cent on all fees and charges by the end of the next parliament.
This is why we’re continuing to push for reforms to the way pensions are managed, with better governance for pension schemes to ensure a legal duty to put the interests of savers first, enforced by trustees.
We also need to see more action to drive value for money in this market, with Government removing the restrictions on who NEST (the National Employment Savings Trust) can offer its products to, and more action to encourage an effective scheme for when workers move jobs.
It’s also why we welcomed the increased flexibility and choice about how to access a pension scheme promised in the Budget.
It is right that people should be able to use the money they have saved in the way that suits their needs best.
But the Government has only looked at one aspect of the problem. They have given people more choice, without doing anything to address whether the options available to them provide real value.
So these greater freedoms need to be accompanied by measures to ensure that the market for retirement income products is one that works for savers.
In my response to the pension changes in the Budget, I set out three tests for the Government’s reforms.
First, people need to get the right advice. The decisions people take about how to use retirement savings they have built up over decades have enormous consequences for the rest of their lives, and cannot be remade.
The Government has promised free guidance for all, but it is not clear what kind of quality they can guarantee. We will continue to press the Government on this critical issue.
We’ll wait for their response to the consultation they have established, but guidance that some industry specialists warn could take as little as 20 minutes is unlikely to be enough for 20 or more years of retirement.
Second, we also said that we wanted to make sure that these plans don’t result in increased costs for taxpayers. We’ve asked for a full risk assessment of the Government’s plans.
There could be unintended consequences for the public finances if higher earners use the new freedoms as a means to reduce the rate of tax they pay. It is suggested that if everyone over 55 took their income as pension contributions it could cost the Treasury £24bn a year.
Even if just 10 per cent did that, the cost would be £2.4bn in lost tax and national insurance contributions.
We also need to be clear about what the Government’s plans mean for social care – whether more people will find they are landed with a big bill or if the taxpayer is.
Third, we have also set a fairness test, with the reforms needing to work for low and middle income savers.
We need a pensions market that works for everyone, not just a privileged few. We called for reform of the annuities market in February, as it’s clear that it isn’t delivering the returns that savers rightly expect. But while the Government have removed the requirement to buy an annuity, they’ve done nothing to improve the market for the many savers who still want the security that an annuity can offer.
We want people to have the freedom to choose a retirement product that works for them. But we want them to have good products to choose from.
This is why we will appoint a task force to look at how we can prevent the risk of retirement rip-offs, and ensure that everyone can have access to retirement products that helps them secure a stable income throughout their retirement.
Rachel Reeves is the Leeds West MP Labour’s Shadow Work and Pensions Secretary. This is an edited version of a speech that she delivered to the Resolution Foundation.