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Nic Cicutti: MAS and industry-led guidance is a dangerous fudge

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Shortly after Chancellor George Osborne announced in his Budget speech that workers would no longer have to buy an annuity when they retire, one website I visit regularly published a list of 10 ‘hidden consequences’ of the pension reforms.

Topping the list was the potential for pensioners to blow their new-found wealth on holidays or fast cars, an intriguing take on the mentality of older people, many of whom are likely to have spent decades carefully salting away money for their retirement.

Maybe it really is possible that, overnight, people’s way of thinking can change so radically. One minute you are slaving away in an office, shop or factory, saving for your retirement; the next you are blowing your dosh on fripperies.

The reality, of course, is that most retirees are well aware how financially difficult their lives will be when they stop work. They will not be splashing out on Lamborghinis. If anything, they are more likely to deprive themselves so that they can leave a little pot of cash to their loved ones when they pass away.

In fairness, way down the list the same article also discussed another potential hidden consequence: that of pension providers which “will try to encourage you to use [your pot] to buy one of their products when you reach retirement”.

Luckily, “the Government is also making it a requirement that retirees receive some guidance from their pension company but it is not clear whether this will be impartial or free”. Barely three months in and it is becoming increasingly clear that the Treasury is looking to insurance companies to provide that supposedly impartial advice.

Dreadful mistake

Last week’s issue of Money Marketing reported that it looks more and more as if the Treasury is moving towards accepting the dominant view within the ABI: that such a service can be safely delivered by the insurance industry.

If so, I think this would be a dreadful mistake. For if there really is a major unintended consequence of the 2014 Budget, it is the fact that hundreds of thousands of people retiring every year will need proper financial advice to help shape their decisions about what to do with their pension lump sums.

And I really do mean advice. Whereas up to now the key debate about post-retirement planning was essentially a regulatory one – how to ‘encourage’ the industry to persuade would-be annuitants to shop around for the best deal – the ante was most definitely upped on 19 March.

The opening-up of pension choices has completely changed the potential to make both far better, and worse, decisions about retirement lump sums.

But to imagine that an industry consistently incapable of reforming its exorbitant 1980s and 1990s pensions charging structures, or genuinely delivering OMO advice, can suddenly discover a reservoir of impartiality deep within its recesses means flying in the face of all experience over the past 30 years. The advice needs to be genuinely unbiased and must be seen to be so.

Moreover, to pretend that half an hour’s ‘guidance’, or a website which takes you through a generic decision tree, is enough to satisfy retirees’ needs is not a tenable argument.

No, it has to be genuine and actionable advice based on a review of that individual’s personal circumstances. And the potential outcomes have to be explained clearly and in writing.

Not every retiree will want, or need, such an in-depth service. For some, a website may be fine. But they should all be offered the same option, perhaps with a ‘free voucher’ entitling them to a set number of hours of an adviser’s time.

While on the subject, that the Money Advice Service can deliver anything approaching the level of advice needed to ex- or would-be annuitants, as ministers and other senior figures in the industry are implying, is a farce. The MAS’s work on the ‘advice’ side of its operations is currently under review because it was judged not to deliver value for money by the National Audit Office report in December 2013.

Contrary to the MAS’s jaunty claim in a press release last week welcoming the appointment of Christine Farnish to review its operations, the NAO found levels of genuine engagement by users of the MAS website to be appallingly low.

Not that I am hopeful of anything better from Farnish, a perennial quangocrat whose experience of the private sector included providing Barclays with consumerist window dressing for a few years – a bank which later got caught up in the late-Noughties bank overdrafts scandal.

Advice means advisers

Let’s go back to basics: around 300,000 to 400,000 people will need genuine financial advice every year. Advisers must be centrally involved in providing that service, perhaps through a standalone body funded by a joint industry and Government levy, managed by Citizens’ Advice, which is far more trusted by consumers than the MAS has ever been. The benefits of expert, unbiased advice at retirement age are huge. Opting instead for a combined MAS- and industry-led service is a dangerous fudge born out of short-term expediency – but with the potential to leave many pensioners worse off in their retirement.

It could all end in tears if we let it.

Nic Cicutti can be contacted at nic@inspiredmoney.co.uk Follow him on twitter @NicCicutti

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Comments

There are 10 comments at the moment, we would love to hear your opinion too.

  1. I suspect many will agree with you that a combination of MAS and product providers delivering “advice” sounds like the worst possible outcome. Actually I take that back, there will be plenty of politicians and MAS executives who disagree with you and think MAS is absolutely the right source for this- but hey what do they know?!

    It would be interesting to know how you think the “free voucher” system might work. Are you suggesting that the IFA community should both contribute to the “joint government and industry levy” and deliver free advice to the consumer? Or are you suggesting the government funds the voucher

    If it’s the former it doesn’t sound like a business model with legs to me

    Where do I find the opt-out button?

  2. Julian Stevens 5th June 2014 at 10:02 am

    Bearing in mind that the average pension pot isn’t much more than £30,000, it seems a bit fanciful to suggest that most people have spent decades salting away money for their retirement. Maybe they have but at nothing like an adequate rate. Having taken their 25% PCLS of £7,500, the remainder applied to some sort of product generating income at, what, 5% p.a. won’t even give them £100 p.m. before tax. Most people with a nett fund of just £22,500 very probably will, IMO, say Oh to hell with it, rather than spending many hours taking first guidance and then advice on what best to do with it, I’ll cash it in for a further lump sum of £18,000 and spend it on this or that.

    Those who, with the benefit of ongoing advice, for which they’ll have been used to paying, really have been salting away decent sums over the decades and have built up a worthwhile fund won’t suddenly decide that now’s the time to seek out guidance from a different source.

    The reality is that you can’t get a quart out of a pint pot, so all this talk about free guidance on how best to deploy piddly little pension funds is much ado about not really very much. Most providers have indicated that they’re not interested and few if any advisers are going to be prepared to spend time with people unless they’ll be paid it. And the dividing line between guidance and advice is, in essence, undefinable. The bottom line is that most customers will simply want the maximum risk-free bang for their modest buck which (sorry to say it yet again) brings us to the need for Assured Income DrawDown products. That’s how I see it anyway.

  3. Ah, there is nothing an economist loves more than a voucher system. Whether it’s schools, healthcare or financial advice, proposing and designing a voucher system allows you to throw tons of imaginary OPM around without ever comprimsing your free-market principles.

    Assuming there are around 600,000 people turning 65 each year, of which perhaps half will have some sort of pension worth speaking of (after discounting housewives and househusbands, the permanent state clients, etc) , a £500 voucher for each of them would cost £90m a year. Sounds a lot, but the personal pension mis-selling scandal cost £12bn in compensation. A stitch in time and all that… and last year’s FCA fines of £131m would cover it rather nicely.

  4. The funding issue will be the key problem for this plan. Thats why the insurers will probably be given the green light – because they will then pay for it.

    Funding it from an industry levy wont work – Can you imagine advisers paying out just for other advisers to get paid? Who then gets the clients and how will it be managed. It cant work.

    Funding it from the government? Not a change with your above figures and an average cost of say £500 per client we are talking a £billion over 5 years. Just what the economy needs.

  5. Nic

    I can’t believe that I’ve actually read an article which I heartily agree with you on ?

    The need good financial advice at retirement is obvious and the government and regulator need to make sure that this is proper regulated advice as laid out in the FSMA 2000 and 2012.

    If MAS is indeed to be re-engineered to include clear signposting to financial advisers then this should be welcomed by the profession. It is however clear that language is the key factor that seemed to irritate many financial advisers.

    The debate over advice and guidance and indeed the word free are just some examples of what I mean.

    The problem with using the word guidance is it will open up even more of a problem in the execution only marketplace which in my opinion is already out of control. It’s interesting that a well-known execution only website has some of the highest complaints many of these clients who believe that they have received advice.

  6. Thinking back to the unlocking scandals of the early 2000, several firms were heavily fined for aiding and abetting folk to splash the cash and pot the consequences – and there was no shortage of demand from Jo Public.

    Scroll forward 15 odd years and what do we now have?

    I don’t think human nature changes much, for the majority of folk with modest pots I think they’ll repeat the “live for today” approach.

    An on advice at retirement, I suppose it may be remotely feasible to provide a basic guidance service for small pots, but not if it has any administrative involvement with actually setting up arrangements. I don’t exactly see why the taxpayer should fund an individuals financial advice cost – what next, service your car for free – new roof anyone?

  7. Tell you what I think; I think that the guy that came up with the idea in the first place and spoke without mandate on behalf of all of us in the industry should be left alone to fix his own problem!

  8. It really does come down to who will pay for this, but what makes everybody think that insurers and pension schemes will want to pay for it? Ok there is the ability to infleunce outcome in the insurers favour but there are the following reasons why not;

    1. Cost at a time pension charges have been capped.
    2. Future regulatory action and redress due to unsuitable guidance.
    3. Inevitable cost and scope creep by regulator and government.
    4. Resources and people required to support this will reduce service elsewhere.

    Realsitically we don’t have enough face to face advice capacity in the UK to deal with the wall of retirees, providers are going to get this one dumped on them. We did not ask for this and knew nothing about it and now have a very short consultation period to put ‘free advice’ in place. Here is another solution an industry windfall tax on providers advisers, fund groups and Lamborghini dealers and the government can set up its own impartial advice service.

  9. Colin Douglas 5th June 2014 at 6:43 pm

    Let’s be clear, an ‘industry levy’ won’t involve advisers. That would be silly.

    To split pensioners into 2 groups, those with a trivial pot and those with a ‘worthwhile fund’ is an over-simplification but let’s run with it. I suspect the majority of those worthy types will never have sought advice and only when confronted by imminent retirement will they be corralled into the ‘guidance/advice’ pen. The argument is essentially should they be lassoed (to continue the theme) for advice or guidance! These people will have the funds available to pay for 2-3 hrs worth of advice, so good guidance should start by suggesting they seek advice.

    Nic, I fear your plea is likely to fall on deaf ears and in a few years you’ll be able to say ‘I told you so’.

  10. Philip Castle 6th June 2014 at 7:23 am

    Video from me in our office explaining their options, guidance discussion from one of my level 3 apprentices followed by 15 minutes guidance discussion with me (all recorded as an MP3 sound file to evidence NO advice given) and then option to book an advice meeting with me. Advertising cost NIL, staff cost negligible and can control who you take on as clients for ongoing service and who it is just a one off transactional service.
    We can do it if we want, I am just not sure if I want to yet……

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