Chancellor George Osborne’s at-retirement “guidance guarantee” pledge risks unravelling with advisers questioning how the promise will be delivered and insurers divided over the plans.
During his Budget speech last month, Osborne told the House of Commons everyone in defined contribution pension schemes would be offered “free, impartial, face to face advice” on their retirement options.
A consultation document published alongside the Budget confirmed the service would provide guidance, not advice.
The guidance commitment is designed to support radical liberalisations that mean anyone aged 55 or over will be able to take their entire pension pot as cash from April next year.
Pension providers are at war over the proposal, with at least two major firms raising the possibility of quitting the Association of British Insurers if the trade body does not insist on the guidance being offered independently of its members.
Meanwhile, advisers are sceptical about the capacity of the industry to provide an estimated 500,000 people a year with the help they need when they are approaching retirement. The ambitious 12-month timetable for creating the guidance service and the meagre £20m start-up budget from the Treasury have also led to serious concerns about whether the Government will honour its promise.
As well as the £20m to set up the initiative, the Government will also introduce an as yet unspecified levy on providers and trust-based pension schemes to fund the remaining costs.
Apfa research shows the average flat fee charged by an adviser for annuities advice is £681. With an estimated 500,000 members of defined contribution schemes retiring each year, based on ABI figures, a fully advised service would cost £340.5m annually.
Money Marketing understands the Treasury is working on the basis that guidance will cost between £70 and £100 per person, potentially costing pension firms a total of up to £50m a year in levies.
Providers say the cost cannot be absorbed and will inevitably lead to higher charges for consumers.
Speaking at a Reform pensions event in London last week, Aviva head of policy, corporate benefits John Lawson said: “It is going to have to be paid for somehow. Let’s say Nest has one-sixth of the population saving with it, that puts the costs at between £10m and £20m a year. What effect would it have on Nest’s business plan? Would it have to put up charges and if so by how much?”
Nest chief executive Tim Jones said: “There is nothing free so it will have to be funded. A sensible algorithm might be for providers to pay based on the number of people they have retiring or the amount they contribute to retired funds.”
Partnership managing director of retirement Andrew Megson says only an impartial service can stop consumers being hit with higher charges.
He says: “If the guidance is run by ceding providers then charges will slowly increase or returns will slowly fall. But if it is impartial, hopefully this will drive competition in the market.
“An impartial guidance service is a great way of forcing providers to absorb the costs and guarantees the customer is not charged indirectly.”
The question of whether providers can and should offer at-retirement guidance has, predictably, caused serious conflict within the insurance industry.
While most providers are publicly tight-lipped over the discussions, a source says “over 40 per cent” of the ABI’s membership believe providers should not be involved in the guidance process.
He says: “History shows the industry has always found a way of gaming whatever is put in place to protect their shareholders’ interests.
“Even after the ABI code was introduced, eight out of 10 people were still not getting good outcomes. So why take the risk and not separate the guidance?”
“There is no way someone who is making money selling products can then be impartial when offering guidance. Free, impartial, face to face guidance is a great idea but it is totally impractical”
However, a senior executive at another major UK insurer says it would be “bizarre” if providers were banned from providing guidance to their members.
A Which? spokeswoman says: “The key to making the pension reforms work will be ensuring providers give consumers high quality, genuinely impartial guidance and advice on their options across the whole of the market.”
Intelligent Pensions technical director David Trenner says: “There is no way someone who is making money selling products can then be impartial when offering guidance. Free, impartial, face to face guidance is a great idea but it is totally impractical.”
Osborne’s guarantee that the at-retirement guidance will be “face to face” also presents significant challenges.
LEBC longevity division director Nick Flynn says: “The £20m the Government is putting forward is just a drop in the ocean.
“Face to face seems like an unnecessary commitment. It will be incredibly difficult to deliver, particularly for the mass of people with small funds.”
Pensions minister Steve Webb says savers will not be compelled to accept the guidance offered.
Webb says: “There will be a duty on the scheme to make sure individuals can access face to face guidance but nobody is going to insist it is face to face.
“So if somebody says they would rather sit in their armchair with a mug of tea on the phone then that is fine. Face to face will be a right but it will not be obligatory. But because we are not trying to overplay what the content of this conversation is, it will have to be supplemented by literature, websites and potentially signposting people to independent financial advice.
“Lots of people will then go onto independent financial advice. If I was a financial adviser I would be quite positive about this.”
The Pensions Advisory Service chief executive Michelle Cracknell says: “All the research we have done suggests this should not be done face to face because most people do not want that. It is not convenient, it can be quite intimidating and people tend to be a bit embarrassed about what questions to ask.
“We think the delivery channels preferred by the public would be things like webchat and Skype. That makes it really do-able and those are things TPAS does already.”
In the wake of the Budget, advisers criticised the Government for “misleading” savers in referring to the guidance service as a “right to advice.”
But when grilled at a Treasury select committee hearing on the Budget last week, Osborne was dismissive of concerns.
He said: “There is a technical distinction between advice and guidance. The Budget document exists, I don’t get up and read it out because it contains all the technical details of the Budget and we publish it at the same moment.
“The speech needs to also communicate in English so people watching it can understand what is meant.”
The terms ‘advice’ and ‘guidance’ being used interchangably will conjure up bad memories for advisers who still smart at the branding of the Money Advice Service, and its controversial advertising campaign which claimed to offer ’independent, unbiased and free’ advice.
TSC member Labour MP for Wolverhampton South East Pat McFadden says: “In financial services there is a material difference between guidance and advice.
“Advice is regulated, and it carries significantly greater consumer weight than guidance. It was wrong for Osborne to use the word advice in the Budget speech.”
But despite the challenges, there remains an opportunity for advisers to dovetail with the guidance service, particularly when it comes to tailored retirement needs and specific product recommendations.
Apfa director general Chris Hannant believes the key is to create an effective referral service.
He says: “Customer preference is important. A person on the guidance route could arrange meetings with two or three advisers, find the cheapest or just the most local. It will partly depend on the size of the pension pot.
“Some of the £20m needs to go into ensuring the handover process is seamless and connects people with the most appropriate adviser possible.”
An alternative idea proposed by the Personal Finance Society would see the creation of a National Retirement Advice Service, funded through the redistribution of regulatory fines.
Writing in Money Marketing last week, PFS chief executive Keith Richards said: “This would include affordable access to expert advice through a network of qualified advisers and the potential to introduce a fully-funded voucher system funded by redistribution of approximately 15 per cent of 2013 regulatory fines.”
He added the service would need to work in conjunction with bodies such as the MAS, TPAS and the FCA.
The FCA has been handed responsibility for developing the guidance framework, with former ABI director of conduct regulation Maggie Craig, now a policy adviser at the regulator, leading the project.
Legal & General pensions strategy director Adrian Boulding says the FCA will create “straw men” models to test the effectiveness of alternative designs.
“The FCA has started work on this and my understanding is it is going to develop two or three possible model, which could range from involving the existing provider to handing responsibility for delivering guidance to an organisation like TPAS. A third possibility would involve creating a role for employers and trustees in delivering it.
“But once the FCA has worked up those proposals the final decision will be political.”
ABI: Consumers will foot the bill for Budget guidance service
MPs grill ABI boss Otto Thoresen on how guidance will work in practice
Association of British Insurers director general Otto Thoresen says the “free” pensions guidance service pledged in the Budget will ultimately be paid for by consumers.
Speaking at a Treasury select committee hearing on the Budget this week, Thoresen faced questions on how the system will work.
The Treasury is working on assumptions the scheme will cost £50m a year, but Price Waterhouse Coopers estimates the cost of delivering the guidance service is more like £120m a year, working out at £240 a head for 500,000 retirees.
Thoresen said the PwC estimate is “not unreasonable”.
He said: “It will be free in that customers do not need to write a cheque upfront but it will have to be paid for and in the end it will be paid for by the customer.”
ABI members are divided over how guidance is offered with some firms insisting the service is delivered by a third party to avoid provider bias.
Thoresen said: “The impartiality test is absolutely crucial. Whichever way we do it, it has to be demonstrably impartial, which will be a challenging test but let’s see how we can do it. I am very alive that this is something that has to pass the test of public opinion.”
He added the service does not need to deliver face to face guidance but agreed with pensions minister Steve Webb that it should be an option.
Thoresen said: “I don’t think it would be sensible for it to be face to face for everyone. For some people this service is acceptable to be delivered over the phone or using technology, while for others it will have to be face to face. My approach would be that we have a system consumers go through and if at the end they still want to talk to somebody then there is that option.”
EXPERT VIEW: PHILLIP BRAY
On the face of it, the promise of free face to face advice for every new retiree should be welcomed, but is it really that simple?
It is now clear that what is on offer here is guidance and not advice, which worries me for a whole host of reasons.
Firstly, who will deliver this guidance? Around 420,000 people bought an annuity in 2012, a further 26,000 or so went into income drawdown. Assuming these numbers stay constant, how can the capacity to see nearly half a million people be developed over just 12 months?
Next, what form will this guidance take? My hunch is it will be a series of decision trees to lead the retiree through to a product type which will meet their needs.
And this is where I start to get really worried.
I know how long it takes for an IFA to deliver a full retirement recommendation and it seems clear the proposed guidance will be significantly less detailed. There is so much more to think about at retirement than simply the final product recommendation.
This leads to the next problem. Imagine Mr or Mrs Smith has gone through the guidance process, and decided an annuity is right for them. How will generic guidance be converted into a specific product?
I am a huge believer that good quality, independent information can help produce better outcomes. But I am worried the new layer of guidance will cause as many problems as it solves.
Phillip Bray is marketing and relationship manager at Investment Sense
ADVISER VIEW: ALAN DICK
It sounds fantastic but my concern is the quality of the guidance will not be up to standard. There will be a massive number of people needing it.
Alan Dick is partner at FortyTwo Wealth Management
ADVISER VIEW: NICK MCBREEN
This is a real hornets nest. You can understand why the providers want to offer this guidance because they will say they have looked after the customer for years and built up their funds.
But ultimately there will be pressure for this to be seen to be independent of the insurance industry.
Nick McBreen is IFA at Worldwide Financial Planning