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Tony Wickenden: Risk and reward in the new pensions world

As the Treasury Select Committee’s report points out, any innovations caused by the new pensions rules will have to be kept under scrutiny to ensure they work in consumers’ interests


Just when the Budget and everything that flowed from it was starting to feel a little bit like old news, the Treasury Select Committee has come up with a pretty, pretty, pretty (nod to Larry David there) interesting set of observations on some of the outcomes from the Budget and what they could mean.

I am going to look at its views on pension reform, guidance on relevant choices, Isas and retrospective legislation. These views provide interesting and thoughtful insight on thinking in relation to some of the key changes introduced.

Let’s look at pensions reform first.

The committee noted that all witnesses who discussed the reform within the TSC welcomed the greater flexibility and choice provided by the Government’s proposed pension reforms. That is unsurprising. The reforms have met with virtually universal approbation, in principle, even from those commercially detrimentally affected. Yes, there are a few reservations but, on the whole, the proposed liberalisation seems to have largely been supported.

An array of new products

According to the TSC, and this comes as no surprise, consumers will need considerable support in navigating a market which is undergoing major change and in which consumers are likely to be offered an array of new products. The TSC recommends that the proposed guidance under the guarantee observes the following principles.  It should:

  • Be demonstrably impartial as to providers and type of product
  • Include at least an initial opportunity for face-to-face guidance
  • Be free at the point of use, with the costs of such provision made transparent
  • Make clear to every consumer exactly what is being offered, the limitations of the guidance and what protection it gives consumers in the event of detriment
  • Be offered from at least 12 months in advance of the consumer’s stated retirement date
  • Be coordinated with Government-sponsored guidance relating to long-term care. The chair of the TSC reaffirmed that “everyone we spoke to welcomed the pensions and savings reforms announced in the Budget, in particular the greater flexibility and choice that they offer to consumers”.

“The ‘guidance guarantee’ announced at the Budget  is an important part of making sure that consumers benefit from increased choice. We will measure the Government’s proposals for the guidance guarantee against a set of principles to ensure their effectiveness.”

Consultation will soon be under way. There is understandable provider concern in relation to the economic impact of this commitment if the responsibility is predominantly to fall on them. This will be especially so, given that a number of providers will have seen a substantial fall in revenue as a result of the liberalisation. It has been estimated that the cost of guidance could exceed £50m pa. Cheap it ain’t!

One has to wonder whether there might be some relaxation of what is meant by “face-to-face”. Would a telephone or skype conference call do? It would certainly help reduce costs.

So what did the TSC have to say on pension reform generally? It felt that the market is likely to adapt, offering a new range of financial products for those approaching retirement. It is crucial that these products are not defective. Were they to be so, the reputation of the financial services industry, which has suffered severe damage in recent years from large scale misselling, would be further tarnished.

The FCA has now been given new powers to intervene early in advance of detriment occurring. In practice, this will be extremely difficult to accomplish without creating other forms of consumer detriment. In particular, it will be essential to avoid stifling market innovation. The use of these new powers will be a major test of judgement-based regulation.

The chairman of the TSC has made it clear that “the pensions reforms are likely to lead to financial innovation. That innovation needs to provide products that are in the interests of consumers and which are sold responsibly, as following the financial crisis, and the misselling scandals, the reputation of the industry is under scrutiny.”

FCA under the spotlight

“The FCA, with its new powers of intervention, will also be under the spotlight. This will be an important test of its commitment to develop judgement-led regulation. Consumers will lose from heavy- handed regulation or the extension of the box-ticking culture that has bedevilled conduct regulation. This achieved little and often protected nobody.  Effective regulations are badly needed, encouraging innovation, but the FCA must also act quickly to bear down on consumer detriment where necessary.”

That there is official concern is to be expected and those developing products for this market – both inside and outside of a traditional pensions/annuity wrapper – will have this very firmly in mind.

Ensuring consumer understanding of any risk associated with new, non-annuity solutions will be a prime prerequisite of course. One cannot ever get away from the simple (yet fundamental) link between risk
and reward.

As various “guaranteed/protected” products have proved over the years, if you require a meaningful level of guarantee or risk reduction there will be a cost somewhere – potentially affecting the “return” side of the equation. Basically, the greater the strength of the guarantee and the lower the “downside” the greater the limitations that will be imposed on the “upside”. Simple.

Tony Wickenden is joint managing director of Technical Connection

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