Industry right to focus on need for effective financial 'guidance guarantee' as part of pensions reform, says expert

Out-Law News | 09 Apr 2014 | 4:21 pm | 2 min. read

UK insurers could be faced with another mis-selling scandal if the government does not properly implement its plans to offer every pension saver in the country "free, impartial, face to face financial guidance" at the point of retirement, an expert has said.

Simon Laight of Pinsent Masons, the law firm behind Out-Law.com, was commenting after Otto Thoresen, head of industry body the Association of British Insurers (ABI), warned that consumers would ultimately bear the cost of the proposals through higher premiums.

Measures announced by the Chancellor of the Exchequer as part of the 2014 Budget would give members of defined contribution (DC) pensions schemes more freedom to access their pension savings without having to buy an annuity or facing heavy tax penalties. However, at an evidence session on the Budget hosted by the House of Commons Treasury Select Committee, Thoresen said that the industry had a number of concerns about a new legal duty to provide independent advice, to be introduced at the same time.

Laight, a pensions expert at Pinsent Masons, said that Thoresen was right to focus on the importance of the so-called 'guidance guarantee' strand of the proposals, adding that "time was short" if the government wanted to implement this "crucial" element of the reforms correctly.

"The Budget, in relation to pensions, had two pillars, both needing to be as strong as each other: flexibility on taking benefits; and financial guidance," he said. "If the latter is not strong, the former will result in bad decisions and creates risk of mis-selling and fraud."

From April 2015, the government intends that savers would be able to access their DC pension savings any way that they wish from the age of 55. All savers would be offered free and impartial face to face financial guidance at the point of retirement backed by the 'guidance guarantee'; a new legal duty on pension providers and trust-based pension schemes to offer this guidance.

Under the proposed new regime, savers would still be able to take up to a quarter of the value of their pension pot tax-free on retirement. Any additional lump sum would then be taxed at their normal marginal tax rate rather than the existing 55% tax rate. Savers would still be able to purchase an annuity if they chose to do so, or alternatively would be able to keep their pension invested and access the balance over time.

In his evidence to the Treasury Committee, Thoresen said that without more details of what was meant by 'guidance', it would be difficult to estimate how much the new requirement would cost. However, he said that a recent estimate of at least 400,000 extra hours of guidance per year, costing as much as £120 million annually, by consultants PwC did not seem "unreasonable" if the proposed requirement that this be delivered face to face in every case was not relaxed.

"We do not think it would be sensible for this service to be face-to-face for everyone," he said. "For some people this service could be delivered perfectly well over the phone or using technology."

"[The guidance] will be free to the customer in the sense that they won't have to write a cheque and it will be paid for by the industry ... but a trust-based scheme will have to find resources and it will be paid for by the consumer in the end," he said.

Thoresen added that although he thought that the industry "could deliver this and deliver it cost effectively", it would be a challenge for providers to demonstrate that any advice was impartial. He suggested that advice could also be delivered by bodies such as the Money Advice Service or the Pensions Advisory Service.