Out-Law Analysis | 13 Oct 2014 | 5:01 pm | 4 min. read
From April 2015 every individual with defined contribution (DC) savings will have a new right to free and impartial guidance at retirement to help them make “confident and informed decisions”.
Guidance will be tailored and personalised, but will not recommend specific steps, products or providers. To this extent we really are talking about “guidance” being provided, rather than “advice” in the regulated sense.
The guidance will be provided by The Pensions Advisory Service and the Money Advice Service, both independent of pension providers and therefore impartial. The guidance is free to members, but not for the regulated financial services industry which will fund the guidance service by way of a levy. As an aside, this means that the financial services industry will foot the cost of occupational DC scheme members who take the money as cash, and therefore never enter the industry as such.
Understandably, the policy makers and the providers have shied away from the idea of providers delivering the guidance. With the inherent conflict of interests there comes a level of risk and discomfort. However, this does not mean that providers have no role to play.
In the current regulatory environment, the more helpful a well-intentioned provider attempts to be, the greater the risk of straying into the advisory space. This is not an illogical position in a world of mass annuitisation but the game has now changed. This may not be the right approach in light of new mass market freedoms underpinned with a guidance guarantee.
If the policy makers are confident that the guidance guarantee will work then they need to allow people to go out and identify suitable retirement products for themselves. We have already decided to treat people as grown-ups by offering freedom at retirement. Surely the logical extension of this is to trust them to be responsible shoppers when hunting for a retirement product. If this means permitting online modelling to point to a particular outcome then so be it; the user can take the experience with a healthy pinch of salt.
Without this extra bit of help we are in danger of leaving a large population of the UK workforce faced with a bewildering array of products which dare not declare their suitability for purpose. If the policy makers really want to equip good decision making, they need to clarify the distinction between advice and guidance in law and let providers steer people towards an answer that might be 'for them'.
What will guidance look like?
Those who take up the offer of guidance will be taken on a journey. That journey will begin with a note of caution; confirmation that the guidance is designed to equip good decision making but without any particular recommendation. A 'fact find' will follow, whereby members will be required to talk about their financial and personal circumstances, possibly in a more searching way than they have ever experienced.
The guidance provider will then be able to talk through the options in broad terms, which are likely to include retirement income products; cash, or a combination of the two. A formal record of the guidance session will follow, as a practical reference source in future, and of course for audit trail purposes if the Financial Conduct Authority ever comes looking.
Limitations of the guidance guarantee
The FCA expects the outcome of these guidance sessions to be: no immediate action; take specialist advice, or buy a product or products directly. This is, in reality, precisely the same set of options faced by members at the moment, or by those who do not take up the offer of guidance.
One of the limitations of the guidance guarantee is therefore that, from the member’s perspective, it doesn’t actually deliver a solution. There is still a decision to make.
What is it that gets members to the next level? What is it that helps to define which of the three options is the one for them and, more particularly, which product or products best suit their financial and personal circumstances?
The answer is, of course, advice.
The role of advice
The 2014 budget reforms heralded a new dawn in innovative retirement products, giving a boost to the retirement market. DC savers will be able to use new products to plot a route through retirement in a way which provides a best fit for their financial circumstances until the end. Some of these products and packages may well be pretty complicated.
High earners and those on medium incomes may already be accustomed or amenable to the idea of paying for advice in relation to financial matters. For this population the best thing about the guidance guarantee might be that it helps to educate members just why it is worth paying for advice at retirement. We are, after all, talking about one of life’s biggest financial decisions.
Lower paid earners are in a different position altogether. Auto-enrolment and default investment strategies have dispensed with, and arguably discourage, member decision making in relation to retirement saving. Come retirement the tables are turned back onto the members. Having spent the duration of the accumulation phase being told what to do, they enter the decumulation phase with a big decision to make all on their own. Guidance might very well enlighten this population of the merits of advice if they don’t already know it, but of what practical use is this if there is no money to pay for the advice?
Being realistic, is the guidance guarantee all this population is ever going to get?
To help this population it would be better if policy makers clarified the distinction between advice and guidance and allowed providers to take a more active role in steering people towards the right solution.
Tom Barton is a pensions specialist at Pinsent Masons, the law firm behind Out-Law.com.
This article first appeared in a white paper by Pinsent Masons addressing different aspects of the FCA's consultation. You can also see our analyses of retail investment advice; 'Project Innovate'; digital technology; social media and financial advice; the barriers to simplified advice; FOS as a barrier to innovation, and local authority duties to advise on social care funding.