Employers are getting poor advice on which pension scheme to choose for auto-enrolment, says Sarah Smart
As the shock of the Budget announcements starts to subside, we start to think about the practicalities of the new world in which annuities will not be compulsory.
One of the hottest topics of conversation is advice: What sort of advice will have to be provided on retirement? Will it have to be free? Who will provide it?
When it comes to getting a good outcome from membership of a DC scheme, there are two key areas where a member could benefit from good advice: what sort of scheme to join, and what to do with their pension pot when they retire.
Why are we only focusing on the advice the member gets about what to do with their pension pot?
So why are we only focusing on the advice the member gets about what to do with their pension pot? The decision of what sort of scheme to join is arguably far more important, as this will have a huge impact on the size of the pension pot they have to spend when they reach retirement.
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We should also focus on the quality of the advice the employer gets
We aren’t focusing on that because the member doesn’t make that choice; the employer makes it for them. But we should also focus on the quality of the advice the employer gets when they make this choice.
Advice provided to employers on their choice of workplace pension scheme is not regulated – an assumption has been made that employers are sophisticated buyers and so don’t need the protection of regulated advice. I think it’s time this was reconsidered.
I took part in a recent panel debate about which sort of DC scheme provided the best outcome for members: in-house DC schemes, Group Personal Pension (GPP) schemes or mastertrusts. GPPs and mastertrusts were represented by product providers, but the in-house DC scheme was promoted by an adviser.
Is it merely coincidence that advisers promote the option from which they make the most money?
Is it merely coincidence that advisers promote the option from which they make the most money as the one that is the best choice for members? When I asked the adviser how he compared the outcome for the member provided by an in-house DC scheme to that provided by a mastertrust there was no answer, just a nervous giggle.
The reality is that advisers to employers are not providing a service that is tailored towards delivering the best outcomes for members. They have not even defined what good outcomes mean for members – there is lots of focus on how to arrive at good outcomes, but not on what they actually are.
We should spare a thought for the advice that is provided to employers about what scheme to use
Whilst we all spend a lot of energy focusing on what advice members are going to receive about how to spend their pension pot, we should spare a thought for the advice that is provided to employers about what scheme to use. It is an area ripe for change.
Sarah Smart is chair of the Pensions Trust.