Small pension pots have forced their way onto the political agenda, with the Department for Work and Pensions deciding to ban short service pension refunds and looking at the possibility of introducing a system of automatic transfers for employees moving employer. But with the RDR set to make it much harder for small savers to access independent advice, there is a real danger that many smaller pension savers will see any good work to raise the value of pension savings undone by the annuity purchase process.
Partnership chief executive Steve Groves says: “We are worried that a culture has developed towards the RDR which means anybody who is seen to be criticising any element of it is written off as a flat-earther.”
Groves is acutely aware that the tide of opinion (in public policy circles anyway) is firmly with the RDR as he begins what he hopes will be a successful push against a potentially damaging sideeffect of the reforms.
He has turned his mind to the impact the FSA’s efforts to boost IFA qualifications and the transparency of adviser fees will have on people with small pension pots.
The problem is straightforward. Groves argues that the RDR in its current form is likely to hit people with smaller pension pots hardest – partly because there will be a fall in the number of advisers on the high street as some will leave the profession rather than sit professional exams and partly because the move away from commission to fee-based advice will make smaller funds unprofitable for IFAs.
Furthermore, and this is where the problem is likely to catch policymakers’ attention, Partnership research suggests the reduction in access to independent financial advice for people with smaller pension pots will result in fewer people shopping around for a retirement income.
Research from the enhanced annuity provider among customers with pension funds worth £40,000 or less suggests fewer than half of annuitants who had shopped around for a retirement product knew what an annuity was. Crucially, 75 per cent of those who chose an enhanced annuity did so because it was recommended by a financial adviser.
Groves says: “We think this is an unintended consequence of the RDR that needs to be looked at and needs to be dealt with. The FSA’s proposals have a really significant risk of inhibiting the poorest pensioners from receiving a good annuity at retirement. We think if it is not addressed, we are going to undo many years of encouraging pensioners to shop around and maximise their income.”
Advisers also recognise the problem. In an online poll conducted by moneymarketing.co.uk earlier this month, 88 per cent said the RDR will create an advice gap for people with Greengross: ’We need to ensure that people with small pension pots do not lose access to advice altogether’ small pension pots.
Baroness Sally Greengross is convinced the issue is serious enough to merit her involvement. The influential campaigner, who is chief executive of the International Longevity Centre UK, chaired a recent debate in the House of Lords on the issue. She says: “As we move into a defined-contribution world, where decumulation decisions are made by individuals, more people are going to need financial advice. At the ILC, we are concerned that the RDR could lead to a reduction in the availability of advice. We need to ensure that people with small pension pots do not lose access to advice altogether.”
The involvement of Greengross will be crucial if the views of the industry are to be represented in the corridors of Whitehall.
She plans to lobby several senior coalition members in the coming weeks. These are likely to include Cabinet Office minister Oliver Letwin and David Willetts, the cerebral minister of state for universities and science and author of The Pinch. The issue will also inevitably land on the desks of pensions minister Steve Webb and Treasury financial secretary Mark Hoban in the near future.
The ILC is gathering feedback from those present at the House of Lords debate and plans to produce a policy paper in March outlining reform options which the Government could pursue.
But how do you convince the Government and the FSA to do something about it and what is the solution? One of the difficulties facing the ILC is the narrow political lobbying path it will need to tread in order to convince policymakers that substantive reforms are required and, moreover, that there is a real risk of consumer detriment if people with small pension pots are unable to gain access to an IFA.
Lord David Lipsey, another attendee at the debate, says gaining traction on a cut in regulatory requirements for small pension pots will be a tough ask at a time when the FSA is desperate to avoid anything that could be perceived as being lighttouch regulation.
Others present at the Lords debate say a reduction in regulation will allow advisers and providers to experiment with simpler, cheaper advice solution for those with smaller pension funds.
But Lipsey says: “The RDR is a done deal and so it is going to be difficult to persuade the FSA to change the structure of the reforms, particularly if you are asking them to reduce regulation.
“You can understand that they would prefer to overregulate rather than underregulate in this field because they underregulated in the past, which led to various adverse consequences.
“I think advisers need to explore different business models which allow them to advise smaller pension funds at more economical rates.”
Sesame chief executive Ivan Martin says the FSA’s refusal to provide any leeway on simplified advice is restricting the ability of IFA firms to serve people with smaller pension funds in a cost-effective way. He says: “In the short term, we are going to have an advice gap. The solution has to be in the framework of the RDR.
“Within the RDR is a concept called simplified advice. The issue with simplified advice is the FSA has abdicated a definition of what it means and what it might be in the future. The regulator is leaving it to the industry to define what that simplified advice process is. The problem is that the FSA are making it very clear that anything that has the word advice in it is going to be judged by the same standards as complete independent advice. Commercially, it is not deliverable because if you want to offer simplified advice you are going to be judged by the same standards as a fully fledged, QCF level 4-trained IFA.”
Groves says a campaign focused on the impact that inappropriate retirement income choices have on Treasury coffers is likely to capture the attention of policymakers.
He says: “The stat that blew our minds was over the last 10 years, £7bn has been lost by people not shopping around for annuities. The impact that has had both on public sector spending and the life-styles and ability of people to achieve what they want has been massive.”
With such large amounts at stake, outgoing Aifa director general Stephen Gay says allowing spiralling regulatory and compliance costs to hit adviser numbers is a serious mistake.
He says the Government should consider long-term measures to alleviate the financial strain on financial advisers as part of a package of reforms. This could include giving a single Government department responsibility for monitoring the impact mounting regulatory costs has on both the advice industry and consumers.
He says: “People who take advice almost invariably end up utilising the open market option, which on average will lead to a 20 per cent increase in their annuity payment. The reality is advice is becoming less available and the RDR will make that situation worse, so there will be fewer places for customers to go to because advisers will be disappearing from the local high street.
“But this is not just about the RDR because there are all sorts of other costs that are borne by advisers. It concerns me that there is no one person or authority that has the job to look at that overall burden of cost on IFAs and say, ’at what point does the straw break the camel’s back?’.
“Nobody thinks it is their job to ascertain at what point the layering of costs which are supposed to protect the public actually has the effect of doing precisely the opposite by reducing advice capacity.”
Hargreaves Lansdown head of pensions research and Pensions Income Choice Association chairman Tom McPhail says developing a register of annuity brokers would help people to access non-advised shopping around services. He also says the model used by Nest, whereby employees are offered a limited choice of pension providers as an alternative to shopping around the entire pension market, could be adopted by others in the industry.
He says: “We are looking at the idea of a register of annuity brokers. There are organisations McPhail: ’Nest’s panel of providers could potentially work for the wider market’ up to provide a shopping-around service without offering regulated advice, so that could be part of the answer.
“I also think Nest’s model, where they have a panel of product providers designed to ensure everyone can at least achieve a good outcome, is one that could potentially work for the wider market.”
Groves says Treasury ministers should consider reforming peoples’ default options at retirement in order to improve outcomes.
“The Treasury is only willing to consider short-term solutions that do not impact on the RDR. It should consider the retirement products people default into.
“For example, at the moment, somebody who is married and does not make an active decision will default into a single-life annuity rather than a joint life. But if you are married a joint life annuity is more likely to be suitable, so that is something that certainly needs to be looked at.”
Those involved recognise they will have to be pragmatic if they are going to get any change out of either the FSA or the Government. There is an impression that the FSA’s RDR team is, understandably, intent on simply getting the reforms “over the line”.
However, this is a critical issue for many pension savers and IFAs which Baroness Greengross appears determined to address.