In what has been a rollercoaster year for the pensions industry, all eyes are now turning to the service that will underpin the Chancellor’s flagship pension reforms – the guidance guarantee. But in the precious little time there is left to get a viable guidance service delivered by April, there are issues yet to be resolved.
The FCA consultation into the Budget reforms and guidance guarantee closed this week. The consultation deadline coin-cides with a report from influential industry consultant Ned Cazalet examining the implications of the new pension freedoms and how this sits in the current financial services market.
So what are the industry’s concerns? What needs to happen bet-ween now and next April to deliver a workable guidance service and what can be done to avoid potential consumer detriment?
Changes to the current framework
One thing the industry agrees on is the current system of pension statements and retirement wake-up packs is not fit for purpose and does not do enough to engage savers in the retirement process.
In his report, When I’m Sixty-Four, Cazalet Consulting chief executive Cazalet argues the current regulatory regime is standing in the way of consumers getting to grips with pensions.
He says among life group bosses and The Pensions Advisory Service, “there is unanimity that customers simply do not understand pension statements.
“They do not work. Tinkering with them will not solve anything. The FCA should stop going round in circles, recognise this stark reality and change the regime radically.”
He adds the FCA should also recognise and work with providers to change the status quo around wake-up packs.
He says: “There is also unanimity from providers and TPAS that customers do not read or understand retirement packs. The prevailing view from those at the consumer ‘front line’ is that packs contain too much information for them to take in. The packs do not work.”
One suggested proposal to tackle the failings of wake-up packs is the “pensions passport”, a single-page document which contains information about the saver’s pension pot and individual circumstances which can then be passed to the organisation delivering the guidance service.
MGM Advantage pensions technical director Andrew Tully says: “This should contain all the relevant details, be free from provider branding and have a clear message on the importance of guidance and advice with appropriate contact details.
“If providers and schemes tell people about the availability of guidance in the midst of a large pack of information sent to a retiring customer, we are unlikely to achieve great take-up. So we believe wake-up packs should be abolished and replaced by the pension passport. This has significant cost savings to industry and more importantly will help customer understanding. ”
Hargreaves Lansdown head of pensions research Tom McPhail agrees. He says: “FCA chief executive Martin Wheatley has spoken repeatedly about the need to stop sending investors lots of confusing information and to replace it with shorter, clearer messages. Replacing the wake-up packs with the pensions passport would be an excellent place to start.
“If the wake-up packs are not abolished and replaced with the pensions passport, a concept pioneered by the Pensions Income Choice Association, investors will not be given a fair chance to shop around.”
Cazalet notes once consumers have gone through the guidance process, they will be pointed back to their provider and potentially signposted to a regulated adviser.
But he believes guidance providers such as TPAS face an “IFA quandary” in ensuring savers are referred to the most appropriate advisers.
Cazalet says: “There are two main issues. Firstly, TPAS is unable to distinguish those advisory firms that have dedicated retirement planning capability (as opposed to a mortgage broker that handles the odd annuity).
“Secondly, as TPAS has little knowledge of advisory firms, it will tend to be in the dark with regard to their various business models, including variations in depth and delivery of service, such as face-to-face advice, use of paraplanners, platform adoption, online, and econ-omic model.”
Responding to these concerns, TPAS chief executive Michelle Cracknell says it is important the referral relationship reflects the needs of both prospective clients and advisers.
She says: “We currently and will continue to signpost people to advice where it is appropriate. We are looking at ways to improve all our signposting, including that to regulated advice, to make it as seamless as possible from the customer’s perspective.
“We also need to know that advisers have a business model that fits the customer profile. We deal with all sorts of people with all sizes of pots, and some advisers can deal with certain ends of the spectrum and others can’t.”
Cracknell adds TPAS has been invited to sit on the Money Advice Service panel which is developing a retirement adviser directory.
“We will input to make sure that directory gives enough information and filtering capability that we can better signpost people to the advice firms that suit them, and vice versa.”
Guidance take-up vs advice
Cazalet believes there is a danger of a “two-tier Britain” emerging bet-ween those who can afford to progress to full advice and those who cannot. He fears the end result of a lack of joined-up thinking between providers, guidance organisations and advisers will be that consumers are left feeling like “pinballs, being ricocheted from one entity to another.”
He points to a guidance pilot carried out between TPAS and an unnamed national IFA earlier this year which saw just 5 per cent take-up. TPAS has since forecast that take-up could reach about 20 per cent.
Apfa director general Chris Hannant says: “There are two different issues here: the take-up of guidance and the take-up of advice. Getting the guidance service ready is going to be a very close-run thing. There is an advantage in that bodies such as TPAS already exist, so there is something to build on but it is going to be tricky.
“Advisers tell us there is capacity to deal with extra clients, but it depends on the type of advice people want. Obviously there is more capacity to deal with one-off advice but most people will need some sort of planning and management of their investments on an ongoing basis.”
The elephant in the room
There is another major issue that is yet to be resolved – the question of who pays. As it stands, advisers could be on the hook for 30 per cent of the total Budget guidance levy.
Hannant says the Budget reforms, and the guidance guarantee, are heading in the right direction but Apfa’s main concern is how much advisers will have to pay to fund the service.
He says: “We will be campaigning on the issue of costs through the passage of the Bill. We don’t think the cost of guidance should put up the cost of advice to the end consumer because that is contrary to Government aims.”
The wider industry has also backed calls to ensure the cost of guidance is proportionate, with Zurich arguing for a cap on adviser contributions and MGM Advantage calling on the Government rather than the industry to fund the first year of guidance.
Clearly, the success or failure of the guidance guarantee will have implications for the Government, regardless of which party is in power. But how the guidance service is delivered could also see the FCA in the firing line.
The Treasury Select Committee is on the alert for any potential consumer detriment posed by the guidance guarantee. Money Marketing also understands the Treasury is expected to take the lead on major policy decisions relating to guidance following concerns about the MAS’ involvement.
TSC chair Andrew Tyrie says: “Successfully delivering the guidance guarantee from April 2015 will be a challenge. The industry will need clarity over what is required in order to get on with it and meet this timescale.
“The FCA, with its new powers of intervention, will also be under the spotlight. This will be an important test of its commitment to develop judgement-led regulation. Consumers will lose from heavy handed regulation or the extension of the box-ticking culture that has bedevilled conduct regulation. This achieved little and often protected nobody. Effective regulations that encourage innovation are badly needed but the FCA must also act quickly to bear down on consumer detriment where necessary.”
What experts are saying on guidance
Just Retirement group external affairs and customer insight Steve Lowe: “What we know as wake -up packs should be terminated – the only thing that people should receive when they are being prompted before retirement should be the Money Advice Service retirement guide. You can’t stop providers marketing to their customers but we have to create some clear blue water for people to engage with the guidance before providers try and sell them products.”
Aviva head of pensions policy John Lawson: “At present the levy is heavily loaded towards advisers. It should be more widely shared, and trust-based schemes and Nest should also contribute. Members of trust-based schemes are most in need of guidance. Allocating guidance costs based on the products or services a consumer chooses is a step too far at the moment. Be we could revisit the guidance levy in a few years when we see who is benefitting.”
Informed Choice executive director Nick Bamford: “Those consumers with pension pots of a magnitude where they will get value for money by seeking advice already do so.
“The FCA proposal for the payment of the guidance guarantee therefore requires we hand over control of part of our marketing budget to the regulator. That simply cannot be either correct or equitable.”