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Ros Altmann: Automatic pension guidance is the bold reform industry needs

Ros AltmannThe work and pensions select committee must be applauded for urging the Government to do more to protect the public

The latest report from the Parliamentary work and pensions select committee is well worth a read. OK, so it does just highlight what financial advisers already know – that the public need help to manage their new pension freedoms – but it also calls for major policy changes that could significantly improve consumer outcomes.

The report urges the Government to ensure that receiving either independent advice or at least free guidance becomes the norm for anyone wanting to transfer or withdraw money from their pension.

This is vital. For decades, the industry has helped consumers build their pensions without much engagement or understanding. This is not always best, as the asymmetry of information puts providers in a powerful position to push consumers into poor products.

Tom Selby: Govt’s pension guidance plans are a cause for concern

In the days when most people were automatically rolled into an annuity, they too often bought the wrong product at a poor rate. In fact, that is what ultimately led to the pension freedoms in 2015. But in this new world it is more important than ever that people understand the implications of any decisions before making potentially damaging choices.

The Pension Wise guidance service was set up specifically to address this but take-up has been shockingly low. That is why the committee recommends a new norm of automatic enrolment into free guidance.

If the process becomes the default arrangement, more people will be protected against making bad decisions. This builds on the behavioural economics principles that have already successfully increased pension coverage across the country.

The guidance or advice must be impartial. Just talking to their pension provider is not enough; people need an unbiased source of help. Of course, free guidance is nowhere near as good as independent advice but it would be an excellent first-step and would help more people understand why they might then want to pay an adviser to take responsibility for these complex decisions.

Have pension freedoms limited choice?

Helping people make better product choices and avoiding paying excessive amounts of tax unnecessarily is important. But one of the most urgent reasons for enhancing guidance take-up is to protect the public from scams.

All pension scams I have seen start from an unsolicited approach of some kind, which is why the default guidance proposal sits alongside the committee’s recommendation for an immediate ban on pensions cold-calling. Ministers say they want a ban but have not yet put proper measures in place.

Of course, a ban will not stop the cold-callers altogether but it would allow us to give a clear message to the public that anyone contacting them out of the blue about their pension is breaking the law, so do not engage with them.

So the committee is right to urge the Government to do far more to protect the public. The present safeguards are simply insufficient.

Automatically arranging for everyone to have free guidance before transferring their pension would be a bold transformational reform that builds on the behavioural economic insights which have already worked well.

Ros Altmann is former pensions minister

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. Of course everybody will love the “free” guidance. It won’t be free though, will it? Somebody will be paying, they always do!(I bet I can guess who). Straight afterwards they will take that guidance as “advice” and not bother with anything else that they have to pay for directly themselves such as personalised independent advice.

    Pension scams, indeed all scams, succeed because of 2 things, peoples greed and stupidity. Those things will always remain no matter how much regulation you have.

  2. Cloud cuckoo land. Sure you can arrange for people to have free guidance or even paid for advice – BUT

    Who is to say that they will take that guidance? As the old saying goes Free Guidance is worth exactly what you pay for it. Presumably this is going to be compulsory. So Mr Bloggs sees that he can trash his cash and buy some nice shiny new things. He is convinced that the State will always pick up the tab if he is skint – after all we live in a Welfare State – don’t we?

    There is still much to be said for compulsory annuitisation -and here compulsory advice would work – after all both parties to the deal stand to be better off.

    |OF course our Governments (all of them) still abrogate their responsibility and the Gurus such as Lady Altmann are complicit. We still have the worst State pension in the OECD as a percentage of final salary. Instead of faffing about with AE, just put up tax to pay for decent State Pensions. But of course dishonest Governments like to pretend with NI and prefer to con the people with a second hand John Lewis big gonk.

    Meanwhile a very Happy New Year (we can live in hope!)

  3. Although I’m an independent financial adviser, I don’t understand why Baroness Altmann says that independent advice should be stipulated.

    The independent versus restricted debate rages on boringly without anyone ever stopping to ask one simple question: what can an independent financial adviser offer that a restricted adviser cannot? The answer is nothing at all as a restricted adviser’s permissions can extend as far as they choose. This is an issue that I think should be explored as being independent is forced on us now (solicitor referrals, etc.) and is actually becoming a burden on IFAs – who wants to recommend the esoteric, illiquid products that we are required to cover to maintain our independent status?

  4. Problem is if people take the guidance as advice and lose money will this body take responsibility. I think not.

  5. Ross Yes you can Ban all cold Calling and it will work, by making the Advice Firm record the source of the new client relationship, and have an effective way of confirming this information, Ie a letter to the ceding scheme to confirm the way in which the client was introduced to the Adviser, And we should have 100% “Advised” crystallisation of pension benefits, even the automatic DB benefits. It can never be always best one way or the other.

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