Should the FSA be accountable for purchasing decisions made on the back of decision trees?
ML: While decision trees are an excellent concept, they may prove difficult to implement. They could be percei ved as 90 per cent helpful and 10 per cent unhelpful.
Providers are likely to want to know how an individual made a decision. If, in years to come, an individual has cause to complain and the provider has recorded that the choice was made by reference to an FSA decision tree and that alone, then the issue of acc ountability is one that the FSA will need to consider.
KH: The parallel is with the way the DSS is being compelled to compensate peo ple for errors in communicating changes to widows' pen sions under Serps. This precedent might be more difficult for the FSA to avoid than the Gov ernment intends.
The real villain of the piece is the way in which charges have been forced down to the point where real advice cannot be afforded. This is not to argue for discredited front-end loads but, by trying to force everyone into a 1 per cent straitjacket when flat charges of 1.25 or 1.5 per cent would have given excellent value to the customer and allowed for the job to be done properly, the pendulum is swinging too far.
At the very least there should be greater use of warnings on the theme of “Let the buyer beware” and “If you do not take advice, you only have yourself to blame.”
MW: I think there are enough caveats in the trees to avoid the FSA becoming embroiled in a misselling scandal or a misbuying scandal. The trees do encourage people to take advice, either from an adviser or their employer where app ro priate. In the end, there are always clients out there who will do their own thing regardless. I could see decision trees as a useful selling tool for a web-based service.
Should polarisation rules on stakeholder be relaxed?
ML: No. The changes to polar isation appear to me to be an ill-thought-out and short-term view of the market. The differ ence between an IFA and a tied agent is something that the majority of the buying public are aware of. Changes to the current system to imp rove the prospect of stakehol der success, which seems to be the Government's main motivation, will do little to help the public. It is likely to cause confusion and leave a client unc ertain about what to do and from whom to seek advice.
KH: The proposed relaxation of polarisation rules for stakeholder makes it clear that the Government is more concer ned with boosting take-up of stakeholder than it is with people getting advice which really fits them.
It is highly debatable whe ther this will actually result in high take-up, especially in the target groups of the lowerpaid. If stakeholder is a precedent for broader abandonment of polarisation, there is the real risk of poorer choice and value for the population at large.
MW: The presumption for relaxation is the apparent inability of the public to know the difference between an IFA and a tied adviser. In which part of the galaxy did this survey occur? From experience, this has never been the case and the relaxation will only lead to more confusion.
In the end, the Govern ment will get its way with easy distribution of stakeholder to as wide an audience as possible. But at what price?
Will the rules on restricted membership for stakeholder promote cherry-picking?
ML: It is not possible to cherry-pick based on prem ium levels. Scheme providers have no real motivation to establish schemes for one organisation and then not offer the same terms to ano ther. At the end of the day, cherry-picking may prove to be a red herring.
KH: Restricted-membership, contract-based stakeholder schemes certainly give the potential for cherry-picking to take place. This is a surprise U-turn by the DSS and could potentially result in higher earners being targeted for stakeholder rather than low to middle earners for whom stakeholder was designed in the first place.
MW: Cherry-picking will happen anyway. Both providers and advisers will be looking to secure the schemes with the biggest premium income and the smaller fish will have to sort themselves out. The great philanthropic goal of pensions for all could founder on the rocks of commercial reality.
Is it time for a full-scale investigation of income drawdown?
ML: Income drawdown arr an gements have proved to be an extremely popular choice for many individuals retiring in the current climate. Com pa red with the alternatives, individuals with bigger pension funds and proper management of their income-withdrawal arrangements have benefited greatly from the additional flexibility which they provide. To suggest a full-scale investigation seems to be unnecessary because advisers are already subject to stringent regulatory requirements in terms of the management of these plans. Also, it will soon be possible to move an income-withdrawal arrangement from one prov ider to another, giving inc reased flexibility.
KH: We understand the PIA is currently looking at drawdown. Indeed, since drawdown was introduced in 1995, it has carried out regular rev iews and has issued two regulatory updates. We have wel comed this proactive app roach.
One of its key findings in the past was the level of knowledge and competence in this area. For this reason, we have devoted a considerable amount of training and technical support to IFAs, including a CD-Rom. We have also supported the CII and Sofa, which have developed training materials and a new half-credit AFPC exam in this area. These are both good examples of the market taking a responsible attitude to new areas of business.
MW: Yes and no. Unfort un ately, this area has been under scrutiny by the regulators for some time and those who give solid advice are being tarred with the same brush as the more unscrupulous or untrai ned advisers. It needs to bec ome a prescribed area of adv- ice by examination.
Unfortunately, an investigation is a double-edged sword and will not do a great deal to enhance the reputation of a battered industry and may. of course. encourage the Govern ment to have a harder look.
Stakeholder drawdown, anyone?
Will the Government's planned pension credit encourage people to save?
ML: In principle, the pension credit is a good idea. Curren tly, the Government probably still needs to look at its numbers. The proposed system may, in fact, discourage individuals to save as the margin bet ween the pound saved and the credit will mean some individuals may find themselves worse off.
KH: While we welcome the pension credit as a step in the right direction, we are concer ned that lower earners who save towards their retirement will still not receive the full benefit of their hard-earned savings. For every £1 they save, they will receive back a maximum of 60p in means-tested benefits, which could be regarded by some as a 40 per cent stealth tax on the lower earners.
Pension credit will und oub tedly offer some people encouragement to save but, in our opinion, for many low ear ners it will still be a fine balance when deciding whether to scrimp and save a small amount for retirement or to sit back and rely on the state.
The added complication of the possible use of Isas should not be overlooked although Isas are not as tax-advantageous as pensions. The onus will be on the Government to ens ure lower-paid individuals fully understand the interaction between modest private fun ded pensions, other savings and means-tested benefits.
MW: The pension credit will give pensioners more income and this is a good thing. But who wants to live on £100 a week? I would have thought that was enough motivation.
Should IFAs be forced to just ify recommending a per sonal pension over stakeholder beyond the existing reasons-why letter requirement?
ML: It had been proposed that IFAs would need to do this. Provided that an IFA can fully justify recommending a personal pension plan, which could be for a number of reasons, then I believe there should not be a need for further justification.
KH: To force IFAs to justify recommending a personal pension over a stakeholder, beyond a reasons-why letter, is wholly inappropriate. It would suggest that stakehol der is a better and more app ropriate product for the vast majority of people when, in reality, a personal pension will continue to be the right choice for many.
The regulator should not introduce product bias into an already heavily regulated sales process.
MW: The reasons-why letter has always been a combination of reasons why and reasons why not. Stakeholder has to be thrown into the pot just like any new product. Therefore, an IFA will have to justify his selection.
If the reasons-why letter is found wanting on inspection, then the consequences are well known. This should be enough. Why add more paperwork to an already overburdened industry?