The industry disagrees on how much advice consumers need: our dispatch from Party Conference
George Osborne supplied further proof of pensions’ increasing political potency at last week’s Tory conference.
Keen for a headline-grabbing announcement to deflect attention from the defection to UKIP of backbench MP Mark Reckless and the forced resignation of junior minister Brooks Newmark, the Chancellor of the Exchequer announced that he was scrapping inheritance tax on pension pots.
It gave Osborne the chance to riff afresh on what has been his biggest vote-grabbing tune of the year: his Budget day announcement that retirees will no longer be pushed into turning their savings into an annuity.
The chancellor’s latest move has been broadly welcomed across the pensions industry, many of whom see it as the necessary final element of the pensions industry reforms set in motion on March 20th. If people can pass on their pots to loved ones, they will be far less likely to blow them on that now legendary Lamborghini.
“Frankly people are not thick, they can work out what to do with their lives”
However the same freedoms will not apply to final salary pensions, which can expect to see outflows of funds, and annuities.
Life insurance companies, which can now anticipate a 90% drop in annuity sales from pre-Budget days, must now be wondering what they did to annoy the chancellor so much. Pensions minister Steve Webb’s gritted teeth comments earlier this year about insurers’ “vested interests “at the National Association of Pension Fund’s presidents’ dinner can be seen as a harbinger of the subsequent backlash against the industry.
However, while the industry works out how to deal with this latest stage of what looks like a permanent revolution, the talk at the party conferences so far has been about whether the guidance arrangements will be fit for purpose.
This issue has been the prime talking point so far at a series of party conference fringe meetings organised by the think-tank Demos with insurer LV=.
Recent comments by The Pensions Advisory Service chief executive Michelle Cracknell that the take-up rate for guidance could be as low as 20% has fuelled growing calls for it to be made compulsory.
John Perks, managing director of LV= Retirement Solutions, didn’t go that far, joking that “we are in UK not North Korea”. But on a more serious note, he added that the important issue was to “create an appetite for advice”.
Perks’ own organisation’s recommendation is that retirees should be entitled to a voucher, which could be exchanged in return for a regulated advice session. This voucher could be delivered for as little as £50 via an industry levy if advisers were prepared to offer the first session for free, he added.
“We should be a little bit more robust in saying that there needs to be some safeguards”
Charlie Elphicke, work and pensions secretary Ian Duncan-Smith’s parliamentary private secretary, argued that people should be trusted to “make the decisions that are best for them”.
“Frankly people are not thick, they can work out what to do with their lives,” said Elphicke, who is the Conservative MP for Dover, adding that those closest to retirement tended to make the best decisions. People can already make decisions on important financial decisions like buying houses without advice, he reminded the audience at the Tory party fringe session.
However Demos chief executive Claudia Wood said the new freedoms called for greater responsibility from both savers and the government.
The state could justifiably expect individuals not to squander the nest eggs that it had helped them to accumulate via tax breaks. Equally, having freed up the market, the government had a duty to protect consumers against the risk of making poor decisions.
“We should be a little bit more robust in saying that there needs to be some safeguards,” she said, suggesting that rather than treating guidance as a one off event, individuals should be able to go back for additional help at a later stage.
Perks suggested advice on retirement provision could be integrated with the auto-enrolment process.
Another option could be to wrap it up into a wider advice process that could embrace social care needs and other later lifetime issues, said Age UK head of public policy Jane Vass, who spoke at the Conservative edition of the event.
“If savers end up with too much choice, they will end up making no choice”
However at both Labour and Tory conferences, the risk of consumer detriment was clearly on speakers’ minds.
Wood reminded delegates that one of the reasons that the annuity market worked so badly was that individuals didn’t shop around for the best product, even when they had the option. Such problems could be writ large under the new regime, she warned, adding that “we are moving into uncharted territory for a lot of people.”
Dame Anne Begg, the Labour chair of the House of Commons work and pensions select committee, agreed. “If they end up with too much choice, they will end up making no choice: it’s not going to be as easy as comparing the market for insurance and that’s difficult enough,” she said.
Vass cautioned that it was “unrealistic to assume engagement will increase because people have more choice.”
Reports that the Treasury is working on overdrive to develop its own guidance service is a signal that its mandarins have woken up to the consumer detriment risks that pensions reforms throws up.
The last thing that Osborne will want next April, as we enter the last lap before the general election, is for pension freedom to turn into a nightmare in No 11 Downing Street.