The Treasury is set to hand providers a significant role in delivering Chancellor George Osborne’s Budget “guidance guarantee” despite widespread concerns that insurers will not meet the Government’s impartiality test.
The Chancellor has promised that everyone will receive “free, impartial, face-to-face guidance” when they reach retirement from April next year. The 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.
However, the question of how the guidance should be delivered has divided the industry. In March, Money Marketing revealed two major providers had raised the possibility of quitting the Association of British Insurers if it did not insist the guidance is offered independent of members and the issue appears to be causing a huge split within the trade body.
Money Marketing understands Government officials have held talks with senior industry representatives in recent weeks during which it was made clear that the Treasury favours providers offering guidance to savers.
One senior industry source says the Treasury is looking for a “pragmatic” solution that can be implemented in less than 12 months time.
“The Treasury are terrified that millions of people are going to ring within months of the guidance launching,” the source says.
“They see a systemic delivery risk that if we have a single utility to deliver the guidance and demand is strong it will fall over. Therefore they want to lean on the providers to make sure it works.”
Another source adds: “The Treasury wants providers involved. Their priority is delivering a system that is sufficiently robust by April 2015.
“Ultimately the Treasury feels it needs to get something in place so it can say Osborne has stuck to his Budget pledge.”
A Treasury spokeswoman insists “no decisions have been taken” on the delivery of the guidance pledge.
She adds: “We’re committed to impartial and consistently high quality guidance and are currently consulting on the delivery model that will best achieve this. We will publish our response in due course.”
Conflict of interest
The argument over allowing providers to offer guidance to savers centres on the issue of impartiality – how can insurers offer impartial guidance when their primary function is to sell products?
The Association of British Insurers has commissioned KPMG to devise several possible solutions to the guidance problem. This work will be submitted to the FCA, which has been handed responsibility for creating the guidance guarantee framework.
ABI director general Otto Thoresen suggests a process could be designed to manage insurers’ partiality if they were to provide retirement guidance to savers.
“The reality is every industry player would admit they are partial,” he says. “In fact, you shouldn’t be working for a company unless you are partial because you should believe in your company and want to give customers more of what you have.
“But there is a discussion about whether a process can be designed where that conflict can be managed.”
Thoresen warns preventing providers from being involved in the guidance process could result in people not taking up the offer.
He says: “There is a point of view that if you have an intervention in the customer service process, the risk that creates is that the customer isn’t motivated to go and have the guidance session.
“The question is how are you going to make sure that people take up the guidance offer and how can you make sure they take action off the back of it?
“But until we get more clarity on the definition of what guidance is I don’t think we as an industry will reach a conclusion on these big questions.”
Just Retirement group external affairs and customer insight director Stephen Lowe says it is “impossible” for providers to offer impartial retirement guidance.
He says: “Product providers want and need to sell products. It’s impossible for them to meet the impartiality test, in reality or in how this would be perceived in the court of public opinion.
“Providers who feel confident that they have treated their customers fairly should have nothing to fear from an external and impartial guidance service.”
A number of other insurers have privately been calling for providers to be involved in offering the guidance but few have made their feelings public. Following the Budget, Prudential warned that “dismissing out of hand the potential benefits of including product providers as part of the eventual solution seems in our view to be short-sighted at best.”
Syndaxi Chartered Financial Planners managing director Robert Reid says: “I do not think providers have the skill set within their own staff to run a service like this.
“This is about the Treasury wanting something to succeed because there is an election next year. It is nothing to do with the quality of the service provided.”
If the Treasury does propose handing providers a role in delivering guidance it is likely to be challenged by MPs.
Conservative MP Richard Graham, tipped by many as a future Tory pensions minister, says: “We promised guidance and we need it. But I do not think it will best come from providers; that is not what we are looking for.”
He adds that while IFAs have a role in retirement planning it was important that whoever provides the guidance does not have a vested interest. He says instead Government services like The Pensions Advisory Service or the Money Advice Service should be “beefed up” to provide the service.
Labour MP for Erith and Thames-mead Teresa Pearce sits on the work and pension and Treasury select committees.
She says: “Once you’re in a situation where someone who has a product to sell you is also involved in providing guidance I’d be very wary.
“Without being rude to providers, the annuity market is what they provided before and it didn’t work. If it turns out providers are directly involved in this I will push for the Treasury committee to look into it. We’d be very lax in our duty if we didn’t keep an eye on anything new that could effect ordinary working people’s financial stability.”
“It would be better to put money together as they do now into the MAS which could be beefed up into something that worked well, though I’d rather it went to the Citzens Advice Bureau. They are trusted and have nothing to gain advising people one way or another.”
Labour also wants providers to be barred from offering guidance to members.
Shadow pensions minister Gregg McClymont says: “The Government has consistently failed to set out exactly what support people will receive in the form of guidance. If this guidance is to be truly independent, it cannot be offered by powerful providers to their existing customers.”
Partnership chief risk officer Kathryn Purves warns if insurers are given responsibility for providing guidance they will also take on additional regulatory risk if something goes wrong.
She says: “If providers get involved in delivering guidance that brings with it a level of regulatory and reputational risk.
“Whilst the guidance isn’t going to be regulated, providers are regulated entities and if consumer outcomes from that guidance are not appropriate the FCA will have to consider how it deals with that.”
Hargreaves Lansdown head of pensions research Tom McPhail expects the guidance guarantee to be delivered by a range of different industry stakeholders, including providers and advisers.
He says: “Everybody in the industry, including occupational sch-emes, providers and IFAs, is going to have a role in making the guidance guarantee work. It is going to be a quick and dirty solution and it is going to be quite superficial.
“Schemes and life companies will have to provide it for their existing customers, but they will also be able to go elsewhere to get the guidance. It will be up to the FCA to set the overall framework but then it should be up to the marketplace to innovate solutions for how to deliver it.”
What politicians are saying on guidance
Pensions minister Steve Webb:
In April, Steve Webb was reported as saying that “instinctively” he would be “nervous” about providers giving the guidance. Later that month he told the work and pensions select committee it is important to “harness the expertise” of the advice community and industry to meet the challenge of providing guidance. He added: “There is already MAS and TPAS so there is infrastructure. We do not want people pressure sold by their providers.”
Work and pensions select committee chair Anne Begg:
“TPAS is keen to do this role and they could scale up but the question would then be who would pay for it and I suspect Government would say it should be industry. I’d be concerned if guidance was given by companies which will benefit from the selling of the end product because it is much harder to guarantee it is independent. I’d much rather it was an independent body that doesn’t have commercial interests.”
Work and Pensions select committee member Mike Thornton:
“I raised the idea with Steve Webb recently for a levy to fund people to go to an IFA at retirement because they do not have a prejudice towards any provider and they will know more than a civil servant. But I do not think it will happen. If providers are involved they must be at arms length, perhaps by funding a body which can provide it. It’s like the old saying ‘justice must not only be done but be seen to be done’. There must be no doubt that no one will be pushed towards a particular provider.”
Petra Griffiths, director, PSG Financial Solutions
Providers cannot offer impartial guidance and should not be allowed anywhere near it. It is a real problem for advisers to get information out of providers at the moment so it would be a nightmare if they were given responsibility for something as important as this.
Phillip Bray, marketing manager, Investment Sense
Guidance categorically needs to be independent of product providers. How can a provider not have a vested interest in pushing their own products? If it is not completely free of provider influence then it will not be impartial.
The guidance guarantee is going to be very superficial, so the member will be given information about tax rates and choices but there won’t be a lot of questions and they certainly won’t be told what to do.
The two critical elements of guidance are the pre-retirement communications designed by the DWP and the FCA, which need to be comp-letely rewritten, and the handoff points within the guidance process.
Some of this is easy. For example, if you have got debts you probably need to talk to the Money Advice Service and if you are going to buy an annuity you should be shopping around the whole of the market.
But where this is going to get really interesting is with the life companies. I expect the lifecos to look to roll over their existing customers into drawdown rather than annuities. We are talking about a completely different population of people potentially going into drawdown and there are significant risks involved in that.
The regulator will need to focus on holding providers to account if a customer loses out because they drain their fund too quickly or their investments don’t work out as they had hoped. Some providers have been pushing for some kind of regulatory exemption but that simply won’t wash.
Tom McPhail is head of pensions research at Hargreaves Lansdown