Advisers are set to face increasingly large levies after Chancellor George Osborne outlined proposals for a “no limits” guidance guarantee as experts estimate the cost of delivering the pledge could hit £30m a year.
In an effort to address concerns that a one-off guidance session would be inadequate, policymakers have decided savers should be able to access the new service in retirement as many times as they like.
But with the regulator proposing advice firms pay almost a third of the ongoing costs of the new service, are advisers effectively being forced to write a blank cheque to fund Government reforms? And will the sector benefit as a result?
The guidance guarantee will be funded through a new industry levy although some smaller firms have been granted an exemption. The FCA’s consultation on the format of guidance conversations revealed there would be “no limits” to the number of times savers would be able to access the service once they are in retirement.
This applies to online, telephone and face-to-face sessions.
Deloitte insurance partner Andrew Power estimates no more than a third of eligible people would use the service more than once.
He says: “Clearly [allowing people to use the service more than once] will increase the cost, I believe by between £5m and £10m. It depends on the quality of the service – the more valuable it is, the more people will go back.
“I predict the total cost of the service will be between £25m and £30m a year. The Association of British Insurers put the cost at £13m but that was based on an assumption that people could only use the service once. It has overestimated the economy of scale – my experience with large-scale projects has been that you do not get the economy of scale expected because to cope with high demand you have to upgrade your technology and systems.”
Informed Choice managing director Martin Bamford says: “It’s a big concern that no limits on the number of people using it could mean the cost could also be limitless.
“We are talking about a significant number of people retiring each year and that number is going up as baby boomers retire.”
Yellowtail Financial Planning managing director Dennis Hall adds: “The Government seems to believe the industry is a never-ending source of funds but you can’t just keep putting up levies for ever. This could mean fewer clients seeking advice and higher costs.”
However, speaking to Money Marketing, Treasury economic secretary Andrea Leadsom says giving savers more freedom over their pensions may lead to more people seeking regulated advice.
She says: “Nobody thinks free, impartial guidance in a format that’s good quality and useful to the retiring person is going to cost nothing. This is a hugely important piece of work and we must get it right.
“So we will set a level for the levy that will bring in as much as is necessary to make sure this is a success but we will also ensure it is proportionate.”
Also speaking to Money Marketing, Shadow Treasury financial secretary Cathy Jamieson says ministers must act quickly to clarify the size of the levy.
She says: “While the Government now admits free, impartial guidance costs, they are not providing figures to show how this will work in practice. The industry needs to know what level the levy will be set at and consumers need to know exactly what they are getting in the way of guidance and at what stage they should take advice from IFAs.”
Apfa director general Chris Hannant says guidance should be limited to one session per person and advisers should not be footing the bill because they will see little benefit. “A retiree will never get anywhere by going round the loop over and over again,” he adds.
Fidelity Worldwide Investment retirement director Alan Higham suggests the creation of an unlimited guidance service will reduce the likelihood of people seeking regulated advice. He says: “If consumers are encouraged to contact the guidance service at all stages, and they can contact them as many times as they like, why would you pay to use a financial adviser?”
The regulator says advice firms which come under the FCA’s A13 fee block and have annual income of more than £100,000 will contribute to the levy. Small firms which only pay the minimum regulatory fee, estimated at 41 per cent of advice firms, will be exempt.
Deposit acceptors, life insurers, portfolio managers and investment fund managers will also contribute.
The Treasury will set the overall amount of the levy and it will be collected from firms by the FCA. More details on the regulator’s approach are expected in October.
The FCA has put forward three options for how to allocate the levy across the five relevant fee blocks.
The first is to base it on the regulator’s annual funding allocation, which would see advisers pay the largest proportion of costs at 30 per cent. Deposit acceptors would pay 28 per cent, insurers would pay 17 per cent, portfolio managers 19 per cent and fund managers 6 per cent.
The second option is to split the levy equally so each fee block pays 20 per cent of costs.
The third is to allocate costs in line with what retirement products and services consumers choose. But the FCA says this would require further research and would not be as easy to implement as the other two options.
While around 350,000 people retire every year, Just Retirement group external affairs and cons-umer insight director Stephen Lowe says the demand for the service, and therefore its cost, might not be as high as expected.
He says: “Less than one in five people will use the service more than once – a great deal of people will not use it at all, and of those who do a relatively small proportion will go on to use it again.”
The Treasury is working with the Money Advice Service and The Pensions Advisory Service on design and implementation of the guidance although other organisations could be brought in to deliver the various aspects of it.
Insurers will have to inform savers with defined contribution pots approaching retirement they are entitled to free and impartial guidance and will have to provide consumers with key information about their pension pot, such as how much it is worth, details of any market value reduction, guarantees or any other relevant special features.
Trust-based schemes will also be required to provide details of any other benefits held by the member.
Savers will be asked for extra information, including their income, tax status, state benefits, debts and what it is they are trying to achieve. They will be told the “scope, purpose and limitation” of the service.
The discussion about relevant options should include taking an income through a retirement product, taking cash, a combination of both and taking no action.
Recommendation of specific products, providers or advisers will not be allowed but more information on where to find an adviser will be given. This could be done through an adviser directory, the FCA says.
Treasury select committee chair Andrew Tyrie has written to the Chancellor to question MAS’s involvement in the scheme, given the committee’s “serious concerns” over its performance. In response, MAS says Tyrie and the Treasury should “definitely” have confidence in them to deliver the guidance.
Mandated regulated advice
Aviva head of pensions policy John Lawson says the Government’s ann-ouncement that savers who want to move from a defined benefit to a defined contribution scheme will be required to take regulated advice could be a boon for advisers.
“Given there are 18 million people in DB schemes, even if a small proportion of people seek transfer advice that is a significant flow of new customers,” he says. “A lot of these people are approaching 55 so this is a big opportunity.”
The Treasury has also revealed further details of changes to the rules governing annuities. Policymakers hope the reforms will spark a wave of innovation from insurers, including annuities where payments can go down as well as up and products designed to help fund long-term care (see box).
Hargreaves Lansdown head of pensions research Tom McPhail says: “When I hear the Government talking about encouraging innovation, it immediately sets off alarm bells.
“There is nothing wrong with innovation in itself but if these products are going to be sold direct to consumers, there needs to be adequate protection in place. If not, then the risk people are rolled over into an inappropriate retirement product will remain.”
Expert view: Will guidance benefit clients?
Most individuals need a combination of help, guidance and advice. So will the guidance guarantee actually meet the needs of clients?
The Budget changes have created some complex retirement income choices, so people will need guiding through the maze of options.
I have no doubt the guidance service will help people understand the options but will individuals be given enough time to be guided in the right direction?
There is a fear if people are only guided part-way through the journey they could get lost on the final leg. One of the most important aspects of the proposals, therefore, is signposting to advice after the guidance session.
While we in the industry may know the difference between guidance and advice, those who use the service may not. And it is not just those with large funds that require advice – almost everyone considering whether to take their pension as cash, an annuity or drawdown will need some form of regulated advice because the stakes are too high to get it wrong.
There are plenty of reasons to be optimistic about the new guidance guarantee but there are obviously causes for concern.
On the positive side, if the customer journey at retirement starts with the message that it is important to get help, then clients stand a much better chance of ending up with the best outcome.
However, individuals may think guidance is a substitute for advice and, because the guarantee service is free, decide there is no need to pay a regulated adviser.
Billy Burrows is associate director at Key Retirement Solutions and director at Retirement Intelligence
Q&A: A guide to guidance
What is the guidance guarantee?
A pensions guidance service that is available for free to everyone from age 55. Access to online, telephone and face-to-face sessions will be unlimited and will all operate under a new brand.
Who will set it up?
Chancellor George Osborne says his department is working with independent organisations such as the Money Advice Service, The Pensions Advisory Service, Age UK and Citizens Advice on the design and delivery.
Who will pay?
The service will be funded through an industry levy and advisers will pay some of the cost.
How much will it cost?
Deloitte estimates the ongoing cost of the service could hit £30m, although the Treasury has yet to set the levy. When it was expected to only be a one-off service, the Association of British Insurers said the could be as high as £13m a year. The FCA will decide how the levy is collected.
What will it do?
Guidance discussions will look at a saver’s circumstances, provide details of options and the pros and cons. A written record of the session will be provided plus where to find a financial adviser. Specific recommendations of products, providers or advisers will not be allowed.