View more on these topics

Scottish Widows head of pensions market development Ian Naismith

As usual when major proposals for change are put forward the harbingers of doom have quickly come to the forefront following publication of the Turner report. Is it the end of advice as we know it? Will tens of thousands of jobs be lost at insurance companies? Should we all give up now rather than suffer death by a thousand cuts?

There is no doubt, if implemented, Turner’s proposals represent a threat to our industry. This would come both directly through business lost to the National Pension Savings Scheme (NPSS) and indirectly through increased pressure on charges and on the cost of advice. The corporate pensions market could be particularly affected. But before we turn out the lights, we should look in more detail at what is proposed.

Turner makes the assumption that his proposals remove the need for individual advice for most people. We may doubt whether his target charge of 0.3% a year is realistic, but even if it is there is clearly no allowance for the cost of advice. That is because Turner believes joining NPSS will be a ‘no-brainer’ for most people. If the contribution you put in is matched pound-for-pound by a combination of employer contributions and Government tax relief you are clearly better off at the end of the day, even if you get caught in the means-testing trap. And with a default investment option, there is no need to make a fund choice.

We could argue with this assumption. Turner himself recognises that people with heavy debts are likely to be well advised to repay these before starting to save. Perhaps that is a job for debt counsellors rather than investment advisers, but many are likely to need guidance on it. And then there is the issue that the default funds are likely to be largely equity-based meaning they carry a high risk of short-term falls. The long-term credibility of the scheme demands that consumers understand this risk, but we all know most people do not study pensions literature in any depth. Without face-to-face contact the risks are unlikely to be well understood.

But if it is possible to join NPSS without advice, it may not be as big an issue as has been suggested. It is generally recognised that cost-effective individual advice for those with modest incomes is virtually impossible, so a system that caters for them without requiring that should be welcomed.

For wealthy individuals, the NPSS could form part of their provision but they will still need a lot more. The proposed maximum contribution is £3,000 a year, which would clearly be inadequate for a high earner. Tax relief at current levels is still likely to be available on other pension arrangements, including Sipps, and the more flexible, customised options are likely to suffer less pressure on charges than packaged products.

The biggest impact on individual advice will be with those who can pay a reasonable amount into pension, but not enough to justify a Sipp. There will undoubtedly be pressure on packaged products, both because it may well be best advice to place the first £3,000 a year in NPSS and because clients will look for similarly low charges under private sector products. For this group we will need to be able to demonstrate the value of products recommended.

One problematic area is people who start with fairly modest earnings but with the prospects of becoming high-earners in the future. Such people could be your clients, or the children of your clients. Is it better to take advantage of the low charges under NPSS and accept that the money will be locked away, or to use an alternative with slightly higher charges but the flexibility for self-investment at a later stage? Whatever the answer, there is a clear requirement for advice.

The biggest issues though are in the corporate market. There will be a great temptation for employers to opt out of arranging pensions and use the NPSS default. They will also be looking for comparable charging levels, which would be very challenging if NPSS came in at the proposed charging level. However, the continuing strong sales of group personal pensions demonstrate that many employers want to look beyond the ‘cheap and cheerful’ option and find pension arrangements tailored to their particular circumstances. Realistically, NPSS would involve a significant reduction in the advice market for employer pension arrangements, but it could possibly be replaced by holistic advice on wider financial services benefits for employees.

In the short term, there could be a major planning blight, as happened before the arrival of stakeholder pensions. We need to give a clear message that individuals and employers cannot afford to wait for a new scheme sometime in the future when they could lose out heavily by failing to save now.

Of course, it is far from certain that Turner’s proposals will be implemented, and there is a view that the Government would be mad to set itself up as an administrator of defined contribution pensions. There is certainly an opportunity for advisers and providers to become seriously engaged in the National Pensions Debate and we need to do it in a way which will ensure all the positive aspects of current pension provision are not lost and that we can significantly improve saving for retirement in a way that benefits consumers and has a strong continuing role for our industry.

Recommended

‘Poor technology systems at FSA’

The FSA’s IT organisation is “woefully inadequate”, according to a report by Orbys Consulting seen by Computer Weekly. The report says the proportionate cost of the FSA’s IT department is more than twice the average of the firms it regulates and, on seven criteria, Orbys ranks the FSA’s systems poor or very poor.

Come down hard on fraud

Employee-led fraud is continuing to go undetected within UK business. There is currently no regulatory requirement to state fraud losses in a companys accounts, which would focus the minds of management on the issue.Nor will any successful company (without glaring financial black holes) feel the need to rock the boat and undermine staff morale by […]

‘Direct channels demeaning advisers’

Insurers selling protection products through direct channels have been critic- ised by IFAs for undermining the advice process and effectively encouraging consumers to misbuy. Members of the Institute of Financial Planning and other chartered financial planners have backed Money Marketing’s campaign, saying consumers need to be better informed on complex product lines. IFA Barry Laymond […]

Newsletter

News and expert analysis straight to your inbox

Sign up

Comments

    Leave a comment

    Close

    Why register with Money Marketing ?

    Providing trusted insight for professional advisers.  Since 1985 Money Marketing has helped promote and analyse the financial adviser community in the UK and continues to be the trusted industry brand for independent insight and advice.

    News & analysis delivered directly to your inbox
    Register today to receive our range of news alerts including daily and weekly briefings

    Money Marketing Events
    Be the first to hear about our industry leading conferences, awards, roundtables and more.

    Research and insight
    Take part in and see the results of Money Marketing's flagship investigations into industry trends.

    Have your say
    Only registered users can post comments. As the voice of the adviser community, our content generates robust debate. Sign up today and make your voice heard.

    Register now

    Having problems?

    Contact us on +44 (0)20 7292 3712

    Lines are open Monday to Friday 9:00am -5.00pm

    Email: customerservices@moneymarketing.com