What makes good pensions advice?

The government’s announcement of Pension Freedoms in the 2014 Budget caught the entire financial services industry by surprise and ushered in the biggest change in retirement saving in the UK for decades. From a de facto obligation on most people to purchase an annuity with their savings, the market shifted suddenly to one where individuals had meaningful choice about how to manage their finances in retirement. But are people able to make the best of their new-found freedoms and have they simply exposed a yawning gap where a functioning market for advice ought to be?

To discuss how the government is to ensure that British savers are able to gain access to the advice they are going to need in this brave new world, Prospect staged a panel discussion at the Conservative conference in Manchester last week in association with Old Mutual Wealth, the wealth manager, featuring Harriett Baldwin MP, Economic Secretary to the Treasury, Jeremy Quin MP, a member of the Work and Pensions Select Committee, Henry Tapper, founding editor of Pension PlayPen and a leading commentator on the market, and Carlton Hood, customer director of Old Mutual Wealth.

One of the major difficulties in discussing financial advice is that, as a regulated activity, the term "advice" is understood very differently by finance professionals than by the great majority of the public. “If you asked the average person whether they know the difference between [unregulated] guidance and [regulated] advice, they would not be able to tell you,” noted Harriett Baldwin. “What people are looking for is help: on the web, by talking to someone on the phone or face to face.”

Notions such as “help,” “peace of mind” and “reassurance” cropped up frequently during the discussion, yet it was clear that among financial services companies there is great nervousness about offering something that falls short of full, regulated advice, for fear of the consequences should anything later go wrong.

There was, Carlton Hood argued, “a race to the bottom between the industry and the regulator, all with the best intentions.” Attempts by regulators to protect the consumer prompted the industry to respond by trying to keep itself safe, which added to the cost and complexity of giving individual advice and put it out of the reach of many consumers. “We need to be able to give help. We need to be able to give rules of thumb. There are simple things that work for 95 per cent of people. We need to be able to say them so that people can have some guidance and we need to be able to do that without fear,” he said.

Old Mutual Wealth had created an online tool to provide customers with so-called “simplified advice”—a regulated service that is less comprehensive and cheaper to deliver than full, face-to-face advice. It had taken 16 weeks to design the user journeys, he said, and 24 weeks to gain the approval of his compliance department.

The Financial Advice Market Review, which is just beginning, would look at what services savers should be able to access short of full-blown advice, said Harriett Baldwin. The aim should be to enable everyone who wants it to access “some sort of help at the key points in their life.”

However, one of the key questions to arise from the early experience of pension freedoms is how much demand there is for advice or guidance of any sort. Henry Tapper pointed out that during the first three months of the new regime, about 220,000 people had accessed some or all of their pension savings under the new rules, but just 20,000 had sought face-to-face guidance from the government’s new Pension Wise guidance service. Harriett Baldwin added that this number represented those that sought face to face advice out of a total of 1.5m hits to the Pension Wise website. But it is clearly too early to conclude that everyone who decided not to seek guidance from Pension Wise, or formal advice, has necessarily made a poor decision, argued Jeremy Quin: “I don’t think there’s a sense that there’s anything to be alarmed about yet.”

In the July Budget, the government reduced the age at which anyone could access guidance from Pension Wise from 55 to 50. And although it was early days and the Financial Advice Market Review was just beginning, there was wide agreement on the panel that a free service such as Pension Wise that is provided by the government and offers free face-to-face guidance to people making financial plans for their retirement feels like a central element of the solution to the pensions advice gap.

Ultimately, there will be a range of answers to the question of how to help people with their retirement planning, ranging from advice for those with enough savings to make the cost of professional advice worthwhile, to cheap or free guidance for those with smaller sums, and extending to well-structured default options for those who do not want to engage with the process at all.

“I fear there will be a large number of people who will never take any kind of informed decision and who will need to have somewhere to go to that they know is the least bad option,” said Henry Tapper. “We need good defaults and we need to build them now.”

‘How can government ensure people get the pensions advice they need?’, a Prospect panel discussion supported by Old Mutual Wealth, took place on Tuesday 6 October at the Conservative Party Conference in Manchester.

You can access a copy of Prospect's July pensions supplement titled: 'We're all pension managers now' here.