Worries over capacity and the potential for mis-selling must be settled before the general election
It sounded so simple when George Osborne was announcing it on ‘Today’ yesterday morning. Rather than sending one of his underlings to appear on the Radio 4 breakfast show, the Chancellor of the Exchequer fronted up the government’s latest steps on pensions reform.
“We have to get away from this patronising view that the state knows best how people should spend their own money,” he said breezily, while outlining how the Treasury would implement its radical Budget move to give pension savers more control over their retirement income.
The key question for pensions professionals since that day has been the guidance savers will receive on how to exercise this new found freedom.
As widely anticipated, Osborne has decided that it would not be a good idea to hand over the job over to financial services providers – the people who brought you the PPI (payment protection insurance) scandal et al. Instead, guidance will be handled by not-for-profit bodies, like The Pensions Advisory Service (TPAS).
However with approximately half a million people retiring every year, the capacity of these bodies will be sorely tested. Estimates published by Capita suggest that TPAS and the Money Advice Service currently deal with around 100,000 queries per annum between them. From April next year, they will be expected to deal with up to five times as many individuals, a massive jump in capacity.
A consultation paper, published by the Financial Conduct Authority (FCA) yesterday, sketches out how the so called ‘guidance guarantee’ is meant to work.
The pension provider or trustees’ responsibility will be confined to informing the individual about his or her pension savings and benefits and then clearly pointing them to the guidance. This ‘signpost’ will tell the individual that the guidance service is available and how it can be accessed.
The guidance provider will then discuss relevant options with the consumer and provide key facts and information on the consequences of each of those choices.
Phone and web-based guidance will be the first, second and maybe final ports of call
To make delivery of the guidance guarantee easier, the government has rowed back from its initial suggestion that every upcoming retiree will be able to receive face-to-face guidance. For many, phone and web-based guidance will be the first, second and maybe final ports of call.
However, the FCA also says that guidance will have to be ‘tailored’, providing consumers with ‘sufficient personalised information’.
Michelle Cracknell, chief executive of TPAS, said that her organisation’s experience suggests that a “personalised conversation with someone who understands the issues affecting people as they come close to retirement can be life changing”.
We can assume that the levy on financial services firms to fund a National Wealth Service will be concomitantly steep
However, the more personalised the service is, the more sophisticated the guidance will have to be.
Mark Wood, chief executive of JLT Employee Benefits, said: “A massive training exercise and the creation of new advisory roles will therefore be required and we can assume that the levy on financial services firms to fund a National Wealth Service will be concomitantly steep.”
And the problem for consumers is that the retirement options world is now a lot more complicated one than the one that existed until March 20th.
Whether to turn their pension pot into cash or an annuity is just one of the choices on offer. The Chancellor’s statement, issued yesterday morning, shows that the Treasury is opening up a plethora of new options such as annuities that continue to pay out after death and others that provide fluctuating incomes at different stages in retirement.
These choices are clearly welcome, assuming that financial services companies are able to use this new flexibility to create products that meet consumers’ needs. However, they will create a new minefield of complexity for the wary saver to negotiate.
And the guidance provider will be barred from pointing towards specific product or advisers, with consumers retaining ultimate responsibility for the decisions they make.
The bulk of those auto-enrolled into schemes will not be able to afford costly advice
At this point, savers will be on their own. The bulk of those auto-enrolled into schemes, with savings in the low tens of thousands, will not be able to afford costly advice, assuming that financial services companies are even interested in offering it.
Tom McPhail, head of pensions research at Hargreaves Lansdown, warned “the guidance guarantee will not help them here as it will not provide specific product advice, and paying for an independent financial adviser may be too expensive to justify.
“There will therefore be a huge job for the FCA to do in policing these new products, and the sales processes around them, to ensure that investors are sold competitively priced and appropriate products.
“Without this regulatory scrutiny, these pension freedoms could be nothing more than a mis-selling charter.”
It is rare to see a financial adviser agreeing with the unions, but TUC general secretary Frances O’Grady echoed McPhail. “Half an hour of the best possible advice will not equip people for what could be thirty years of managing their pension pot.”
Given the gravity of these concerns, implementing the new guidance framework by April next year looks a tough task.
With less than 200 working days to go, the clock is ticking
Graham Vidler, director of external affairs at the National Association of Pension Funds said: “They (consumers) will also want to be confident that the new service is fully-tested and ready to deliver from day one. With less than 200 working days to go, the clock is ticking.”
And Osborne should be more concerned than he was letting on yesterday. His move to liberalise retirement income has so far been given a big tick by voters.
Any concerns about mis-selling, like the more fundamental worries that this move will increase long-term pensioner poverty, won’t be an issue until long after he has vacated No 11 Downing Street.
However, a botched implementation in the month running up to the general election on May 7th would be manna for the opposition as it would undermine the government’s reputation for competence.
The Treasury project group, which was announced yesterday, clearly has its work cut out therefore to both get the guidance right and delivered on time.