When the Government issued its Freedom and Choice in Pensions consultation response last month, the initial clamour inevitably focused on the fact that advisers look set to pay a sizeable chunk towards Chancellor George Osborne’s guidance guarantee.
But another significant development contained within the document has received scant coverage in comparison. This is the Government’s decision to mandate advice for savers wanting to transfer out of defined benefit pension schemes.
Now, cynical journalists are often berated for focusing on the bad and not doing enough to highlight the good. While undoubtedly the requirement for regulated financial advice in this sphere creates a burgeoning advice opportunity, there is a cloud to this silver lining.
First, it is worth noting that just as Osborne’s flagship pension reforms have been dubbed a political masterstroke in the run-up to the general election, the decision to mandate advice on DB-to-DC transfers is equally politically motivated. As Towers Watson senior consultant Stephen Green points out, the advice requirement is the Government’s “first line of defence” for warding off any potential misselling scandals that loom on the horizon as a result of the changes.
With employers keen to see the back of expensive final salary schemes, and savers flush with their wide range of pension choices, advisers will need to keep this in mind and document their recommendations accordingly.
Another factor is the environment in which this advice will be given. There will be people who, perhaps unwittingly, decide to give up the inherent guarantees in their DB pension to take advantage of the new pension freedoms. To be forced down the advice route, only to be told that decision is not in their interests, and then be charged for the privilege will not sit well with savers. Mandatory advice, while well founded, does not exactly foster the trust and the kind of working relationship good advisers have been striving for.
Finally, there is the issue of flexible access to pension pots from within DB schemes themselves. When pressed by Money Marketing, the Treasury refused to be drawn on whether mandated advice will extend to those taking income while staying in their DB scheme.
The Government needs to clarify its stance on this, and quickly, or risk a bizarre situation where those transferring to DC are given advice while those who choose to remain a DB member are not.
Roll on April.
Natalie Holt is editor of Money Marketing. Follow her on twitter: @Natalie_Holt_MM