The guidance guarantee: Reason no.346 why the Budget pensions proposals were not thought through
In the Budget the Chancellor announced that he was abolishing the requirement for Defined Contribution (DC) pension savers to turn their pensions pot into regular income though buying an annuity. He also said that from next April everybody would be entitled to a free guidance session on how to navigate their retirement options.
Everyone is now trying to make sense of this pledge – and today the National Association of Pensions Funds and the Association of British Insurers have warned that without detail the pledge is undeliverable.
They are right to be concerned. This is further evidence that the Budget proposals were designed to grab headlines not make sound policy.
People already struggle to make good choices at retirement. The relative failure of the annuity open market option shows this.
The Budget proposals open up even more choice at retirement, and what the ABI and NAPF are really saying between the lines today is that there is not enough time to create the structures needed to provide quality independent guidance to all new retirees by next April.
At present there is a clear difference between advice, which is regulated and can include advice on product purchase and investment choices, and guidance, which is not regulated and cannot involve sales.
The ambiguity of language – with both “advice” and “guidance” used to describe the budget proposals – suggest some difficulty here. The budget is really creating a third category of interaction which could be called “retirement guidance”.
This will be an extremely important conversation. It will need to be conducted to the highest standards and be free from vested interest. It will therefore need to be regulated, (though with different rules to those used for advice.)
There seems to be an emerging consensus among many interested in this issue that guidance should meet the following principles:
- Independent of commercial bias – the service would not be credible if there was any suggestion of commercial bias.
- Personalised, not just generic – for the service to provide meaningful support it must receive inputs and produce outputs personal to the individual, to be able to focus on the right issues.
- Person-focused, not pot-focused – the service needs to take a broader view of users’ circumstances than what to do with an individual pension ‘pot’ or pots, and should be issues-focused rather than pot-focused.
- There when people need it – available for people to use on an on-going basis, and not as a one-off event.
Full advice can only be given if the advisor is aware of all the member’s different entitlements and this requires a significant level of knowledge and experience as well as full disclosure of someone’s financial position.
While these are sound principles the cost of providing this level of guidance will be significant, particularly if give face to face. It is not clear how this could be funded. If it is to be funded from an employer’s overall pensions spend or from the management charges applied to individual pension pots, it can only mean a reduction in the benefits provided to members. Given the government is expecting to collect more tax as a result of budget changes, there is a strong argument that they should pay the costs of guidance.
Most people requiring advice will not have the relative wealth of the people the pensions industry are used to advising. This means advisors will need to have a clear understanding of the benefits system as well as the taxation system. There is a lot of interest in giving bodies like the Pensions Advisory Service and/or the Money Advice Service lead responsibility. This will be a big challenge for them.
The proposals talk about advice “at retirement” but that can be a complex journey. For example, a member may cease full time work at say 62 but not choose to draw down their pension benefit. Is the guidance required at that point or when the benefit is first accessed?
For many there are five possible stages between work and their death:
- The pre-retirement phase when workers are beginning to seriously think about retirement.
- A transition stage when many will cut their hours and rely on a mix of wages and savings/pension income.
- Active retirement when people are still relatively fit and healthy and need income to support activities, interests and hobbies.
- A less active stage when people’s health starts to restrict their options and probably mean they require less income.
- A final stage when people may require expensive care either at home or in a care home.
Each of these requires different guidance and a single session in someone’s sixties will not provide what is needed.
I am not convinced that this system can be made to work. The problem comes back to the Chancellor’s decision to tear down an admittedly broken system without putting anything in its place. His talk of individual responsibility and financial services innovation are chillingly reminiscent of the 1980s world of “personal pensions” and mis-selling scandals.
A better approach – which can perhaps still be made to work – is for some hard thought to be given about default paths for turning pensions pots into retirement income – based around cash for small pots and for those with bigger savings, drawdown from a default investment strategy for the early years of retirement with longevity risk pooling kicking in when people reach an age when enough people die to make pooling worthwhile.
Guidance could then at least be structured around a process that asks the question “are there good reasons why you should not follow this default?”. That may be a question with a positive answer for many, but it is still a much more manageable process than an entirely open-ended process.