Providers face tens of millions of pounds in costs each year to run the pensions guidance service announced in the Budget and may be forced to run group sessions to prevent costs spiralling.
Delivering his Budget speech last week, Chancellor George Osborne said members of defined contribution schemes “will be offered free, impartial, face-to-face advice” at retirement from April 2015.
But a consultation document published alongside the Budget confirms the service will provide guidance, not advice.
The Government has pledged £20m over the next two years towards set-up costs for the initiative, which will also be funded by an unspecified levy on providers and trust-based schemes.
Experts say the commitment to a face-to-face service will push up costs significantly.
Apfa says the average flat fee charged by an adviser for annuities advice is £681. If a fully advised service was offered to the estimated 500,000 people retiring with a defined contribution pot each year, the annual cost would run to £340.5m.
At the other end of the spectrum, very basic guidance is likely to cost less than £100 per person or £50m annually. In the current financial year, the Money Advice Service spent £7.1m delivering 101,200 face-to-face money advice sessions, equating to an average spend of £70 per person.
Deloitte insurance partner Andrew Power says: “If the service is simply presenting three or four different options, it could be done in 15 minutes and be reasonably inexpensive. But to offer a service which gathers a level of detail on the client’s situation and is delivered by someone more qualified – while still not stretching to full advice – would take around half an hour and cost about £250 per person.”
But while Power says this would be preferable to a MAS-style service, he warns providers need to be careful not to fall foul of the FCA’s rules on advised and non-advised services.
The Budget consultation paper says the FCA will develop standards for the guidance.
But National Association of Pension Funds policy lead on DC pensions Richard Wilson says: “The FCA is not particularly fast moving so it will be very challenging to deliver this in 12 months from a standing start.
“How long will it take for the regulator to set out the standards and for each provider to work out the costs and delivery? It will be a nightmare.”
Experts say one way to keep down costs would be to deliver the guidance on a group, rather than individual basis.
Apfa director general Chris Hannant says: “A lot of information is generic, so you could deliver it to a group of people, which would still meet the face-to-face requirement.
“And potentially you could dovetail advisers into such an event to help create a seamless link between the guidance service and full advice.”
Power agrees: “You could have an adviser delivering the guidance, then promoting his fully advised service afterwards for those who are interested.”
Wilson adds: “The cost of providing face-to-face guidance would be much higher for providers with members all over the country. For an organisation like Nest, it will be challenging.”
Early signs of a row over how the initiative will be funded are also emerging. The Association of British Insurers says the cost of guidance should be spread across the whole industry.
But Hannant says: “I cannot see how advisers should pay for this by any stroke of logic. It would be like charging them for a competitor.”