The reaction to the pension changes George Osborne announced in his 2014 budget was initially one of surprise, both at the scope of the changes and the timetable for their implementation. While the changes themselves have come to be generally welcomed (and Labour has indicated that it would monitor the impact of the changes rather than commit to rolling them back) the rapid timetable has been subject to consistent criticism.
Recognising that the changes would leave people with potentially complex decisions, Osborne also outlined in the speech how they would be assisted in making their choice – “And we’re going to introduce a new guarantee, enforced by law, that everyone who retires on these defined contribution pensions will be offered free, impartial, face-to-face advice on how to get the most from the choices they will now have.” Soon after this was clarified as a “guidance guarantee” rather than advice and the difference, as we shall see, is significant.
This left many, financial advisers most of all, wondering how this guidance was to be provided. The details have emerged slowly over the course of the intervening months and, at the time of writing with just three weeks to go until launch the proposition still appears to be not quite fully formed. So this article will look at two broad issues:
- How will this guidance be provided?
- How will this impact on financial advisers?
Who will provide the “guidance”?
The guidance guarantee is to be delivered under the brand name of Pension Wise and by now many people will have seen this through an extensive marketing campaign. Widespread brand recognition is deemed to be essential the ability to access whole pension pots is likely to act as a magnet for fraudsters. As an attempt to tackle this it will be a criminal offence to pose as a guidance guarantee service.
The intention is for the service to be delivered by organisations that are independent from pension providers and so free of potential conflicts of interest. The development of the Pension Wise website, and service as a whole, is being overseen by a team within the Treasury and two delivery partners have been engaged for specific roles:
- The Pensions Advisory Service (TPAS) will operate the telephone guidance channel
- Citizens Advice will provide face to face guidance
Will Pension Wise be able to cope?
One critical issue which has not been fully addressed is the level of demand for the Pension Wise service and whether each channel will be able to cope. The most flexible option will clearly be the web based service and Pensions Minister Steve Webb has recently stated that “The vast bulk of people will go via the web or phone …” However, research into likely demand for the service by the CII in 2014 suggested that 57% of the target group would prefer to receive guidance face to face. Furthermore the research suggested that 92% of the target group were likely to use it if those delivering it were impartial and qualified.
This last point highlights another area of contention with the Pension Wise proposition – are the individuals providing the guidance going to be sufficiently knowledgeable? Commentators quickly picked up on the apparent discrepancy between the level of knowledge required in roles with Citizens Advice (pensions knowledge desirable) and TPAS (pensions knowledge and a CII level 3 certificate required).
In order to address this the Government announced at the end of January 2015 that guidance staff at both delivery partners would undergo similar training and would be accredited as having reached an appropriate level. This external and independent accreditation is now to be undertaken by the CII.
What will guidance look like?
The FCA has published a set of standards which guidance providers must adhere to (although its disciplinary powers seem to be limited to making recommendations to HM Treasury).
The standards refer to guidance as providing consumers “with information about particular types of financial products or services that may be relevant to …. retirement options and the potential advantages of those options.” In addition, guidance providers cannot “sell, arrange or facilitate the sale of, or explicitly or implicitly recommend, a financial service or product”. In other words, guidance provides generic information and not regulated advice.
The standards also provide the clearest idea we have of what a guidance call/meeting will look like.
Guidance sessions are expected to last around 45 minutes and to comply with the standards the guidance provider will need to:
- Inform consumers of the scope, purpose and limitations of the session
- Inform consumers about the range of information they may ask of them during the session
- Identify information about the consumer’s accumulated pension pots and other financial and personal information as appropriate
- Identify, and provide information on, the relevant options for the customer including coverage of: guarantees, special features, restrictions or conditions, protected rights and exit charges
- Identify, and provide information on, other factors where relevant such as: long term care needs, sustainability of income and life expectancy
- Alert the consumer to other sources of information and advice as appropriate – this includes regulated financial advice
- Identify the next steps the consumer should take including: referral to other sources of information, the need to shop around, and potential tax/debt obligations.
The consumer must then be given a record of their guidance session. This will be a standard format document recapping the following elements of the meeting:
- Information provided
- Options discussed
- Factors relevant to the exercise of the options
- Other sources of information or specialist advice
- Information on how to shop around
- A statement that the consumer is responsible for the decisions they make.
Rather than set very specific standards the FCA states that the guidance delivery providers must “work together to establish a consistent process” for both the session and the guidance document. The overall aim of this is to give a level of consistency between the providers that would allow consumers to move between the web/phone/face to face guidance channels as seamlessly as possible.
The reaction to Pension Wise from financial advisers though has been ambivalent at best, but this may be an overly pessimistic view
In addition the standards set out some general requirements for the guidance providers to deliver the service: with due skill, care and diligence; to a good quality; and in a timely manner. Staff providing the guidance must have the skills, knowledge and expertise necessary to carry out their duties. This includes knowledge of specific pensions topics but stops short of any compulsory qualification requirement.
So, what will Pension Wise mean for regulated financial advisers?
While the pension changes arising from the 2014 Budget open up new options for those entering retirement they also make their choices far more complex. The recognition that people would not be able to make informed choices without some assistance was acknowledged by the inclusion of the guidance guarantee. The reaction to Pension Wise from financial advisers though has been ambivalent at best, but this may be an overly pessimistic view.
Pension Wise is explicitly not regulated financial advice so it is not direct competition. Consumers with straightforward arrangements may well find that their needs are fully met by the guidance service and that they have no need to then search out regulated advice – the average pension pot is under £30,000 so many consumers are likely to fall into this category. However, this strata of consumers is also likely to find that regulated advice, even if they wanted it, may be unaffordable for them. There is a real danger that a significant group could fall between two stools, where guidance is not enough and advice is unattainable.
Consumers with larger pots are also likely to have a more complex situation and a wider range of options and choices. It seems unlikely that all but the most financially savvy would emerge from a guidance meeting knowing exactly what they should do. FCA standards state that the guidance providers can “refer a consumer to a directory or other list of financial advisers …” so Pension Wise will link regulated advisers on such directories with clients who recognise their need for advice.
Such clients though will also be aware of the issues they need to consider and the questions they need to ask. Rather than worrying about the level of knowledge of TPAS or Citizens Advice staff, regulated advisers should ensure that they are themselves in a position to provide a level of service these clients will demand.
As well as intimate knowledge of the new pension rules advice firms may also need to consider whether their systems are up to the task. The wealth management arm of at least one bank has decided that it will not be possible to provide effective advice on pension benefit choices without introducing cash flow management software (such as Truth or Voyant) to model the long term impact of each option.
So, while Pension Wise has been rushed through and will probably have numerous teething problems it is also, undoubtedly, necessary. The impact of regulated financial advice may turn out to be negligible but it could bring in additional, enthusiastic clients. For the time being though, all we can do is wait and see.