Pension freedoms guidance & advice - Parliament wades in
The Work & Pensions Committee, following a call for evidence in early September, has published a report considering the first six months of the new pension freedoms.
The pension freedoms permit individuals aged 55 and over to access their defined contribution pension pots. Initial news on the progress of the pension freedoms has been generally positive, with the report noting “it appears consumers have taken largely sensible decisions and have not taken upon themselves to make impulsive purchases of Lamborghinis”.
The report considers a number of areas including (1) Pension Wise, (2) pension scams, (3) the gap in the advice market and (4) available data on the pension freedoms. The report makes a number of recommendations, including calling on the Government to consider the issue of insistent clients.
There is a lack of data available in relation to pension freedoms and particularly the impact of the Pension Wise service. The Committee considers the Government's “reticence” to publish statistics on the effects of the pension freedoms to be “unacceptable” and invites the Government to publish, or require regulators to publish, statistics on Pension Wise and advice provided in relation to the pensions freedoms. The report envisages that these statistics should be published on a quarterly basis and should include information about customer characteristics including pension pot size, the take up of each channel of guidance and advice, subsequent decisions taken and the reasons for those decisions.
Pension scams also feature. Readier access to pension pots, combined with consumers' difficulties in making decisions regarding those pension pots and their future finances, creates fertile ground for pension investment scams. The report recommends that the Government publicises this issue, in particular by warning consumers that the Government does not cold call individuals to discuss their pension options.
Reliable, affordable advice is a constant theme. The report is particularly damning of Pension Wise. Pension Wise is a guidance service available to all consumers 55 and over with a defined contribution pension, offering a one-off free 45-minute consultation. There is a lack of information in relation to the take up of Pension Wise, but it is reported that only one in ten of those who have used a decumulation option on retirement since April have used the Pension Wise service. The report sees Pension Wise as tacit acknowledgement of the gap in the advisory market. Pension Wise must be made more attractive for consumers, says the report, by better signposting the service itself, and also by tracking how pension providers signpost the service. The report also recommends that the Pension Wise service should provide a more holistic guidance service including considering information in relation to an individual's property wealth, benefit entitlements, tax implications, care costs and debts in order to offer more personalised support. This sounds more like advice than guidance.
The report focuses in some detail on what it calls “the advice market and regulatory clarity”, highlighting the so-called “advice gap” which the pension reforms has brought into sharper focus. This is an issue on which we blogged last week. Also featured are the Financial Advice Market Review (FAMR) and the FCA consultation on proposed changes to its pension rules and guidance. Chris Hannant of APFA is quoted as remarking that consumers are looking for a “Marks & Spencer service” whereas the market offers “Saville Row”. Quite an apt comment.
The struggle to fill this advice gap is discussed. “Robo-advice” is considered (advice driven by algorithms with personal advice more like a “cherry on top” than the substance of the service.) There is also commentary on the difficulty of distinguishing between 'advice' and 'guidance' when all providers carry “advice” in their name - the Pension Advisory Service, Citizens Advice Bureau and Money Advice Service. This is perhaps most acute for consumers who use the Pension Wise guidance.
Advisers too face difficulties and the report considers insistent clients and adviser confusion over issues such as what is a “safeguarded benefit”. In light of difficulties surrounding these regulatory issues some schemes are requiring that members obtain independent financial advice before all transfers out of final salary schemes, even for pots below £30,000 where this is not a requirement.
Examining affordable solutions to plug the advice gap should be the Government’s first objective in the FAMR, with the second objective being clarification and simplification. The Government is invited to clarify the distinction between guidance and advice, the definition of safeguarded benefits and insistent clients. No doubt this invitation will be endorsed by the advisory industry.
Overall the report, despite the headlines about the Committee heralding the next mis-selling scandal, provides a balanced view on some of the issues currently facing the pension freedoms and the wider financial advisory industry. It is also helpful from an advisors' perspective that the difficulties in relation to the distinction between guidance and advice and difficulties with insistent clients are both acknowledged and further brought to the Government's attention.
The Committee's conclusion that improvements in guidance and advice are crucial to the success of the pension freedoms, that consumers should be able to choose what to do with their retirement savings, but must have freedom to make informed choices cannot be disputed. How we get there in a way that is affordable for all consumers? That question is left unanswered.