The financial services industry may balk at helping to meet the pension ‘guidance guarantee’ costs, but it could be worthwhile in the bigger picture, writes Stephen Lowe, group communications director at Just Group.
In the wider context, we should face the likelihood that the more pension savers who make poor decisions or succumb to scammers, the more likely it seems that the flexibilities currently available under pension freedoms will be curtailed.
A more immediate benefit for financial advisers was summed up in the Department of Work & Pensions Committee’s inquiry into pension freedoms: “Informed and confident savers are more likely to take up financial advice.”
The difficulty with setting any policy is that it must work across a diverse range of consumers. When it comes to pensions that’s certainly true. Some people are enthusiastic about pensions and reasonably knowledgeable.
Others are positive about the idea but feel a bit bamboozled by the complexity of the practicalities. Not everyone is interested and some are downright suspicious.
Regulated advisers usually deal with clients who are either enthusiastic to start with or, with the magic of financial planning, will at least become appreciative.
But those customers aside, that still leaves a majority of savers not taking advice.
Guidance
If we cast our minds back to March 2014, we’ll remember there were two parts to George Osborne’s pension reforms.
The first was the extra flexibility for pension savers to access their cash. That part has sunk into the public consciousness to the point that the Financial Conduct Authority (FCA) has called taking pension cash early “the new norm”.
The second part was the promise that pension savers thinking of accessing cash would be entitled to free, impartial and independent guidance. The architect of pension freedoms recognised that people would need help and support if they were even to have a chance of making good choices.
That promise manifested itself in the form of the government’s guidance service, Pension Wise. This hasn’t yet become part of the public consciousness.
Hopes that taking guidance would become a “new norm” have not been met, with only around 15% of pension savers going through guidance before accessing cash.
The government, concerned about poor choices such as people accessing pensions to park the money in cash or falling victim to scams, wants guidance to become the default option for those accessing pensions.
The Financial Guidance and Claims Act 2018 puts the responsibility at the door of the FCA to ensure that pension savers accessing cash have received appropriate guidance or have opted out of it.
Industry insights
Research carried out by the Behavioural Insights Team for the Money & Pension Service (Maps), covering those who had not received guidance, tested two scenarios on savers contacting their providers with a view to accessing cash.
After six weeks, about 14% had booked an appointment and 11% had attended, compared to 3% booking and 3% attending in a control group working under the current regulations.
Academically, that’s not a bad result.
But in the real world, it doesn’t come close to the behavioural transformation required for the mainstream. And it’s worth noting, the trials were less effective among groups who may need the guidance most, such as the less wealthy and less knowledgeable.
One conclusion from the trial is that asking callers if they want guidance will never work because many will be thinking ‘not really, I’ve just rung for my cash’. They will naturally be more inclined to accept whatever will speed up the process.
Clearly a better way would be to provide the guidance months, or even years, before the pension can be accessed.
This avoids the carrot of instant cash dangling before their eyes and gives savers a better chance of grasping some of the complex issues Pension Wise helps people consider – such as how long they are likely to live, when are they likely to stop work and what other assets do they have at their disposal.
A simple switch in approach so pension savers are automatically taken through a guidance session unless they specifically inform Pension Wise that they want to opt out will quickly establish a new behavioural norm.
This emulates the success of automatic enrolment into pensions which has low drop-out rates.
It would be consistent to carry that idea into the decumulation or un-saving phase, positioning guidance as free professional help just as many employees now see their employer contributions as free money.
Conclusion
The jury is still out on the progress of pension freedoms.
The Work and Pensions Committee recently launched its third inquiry into the 2015 reforms, initially focused on scams but then widened to include the protection of pension savers.
In the last Pension Wise user evaluation report, data showed 49% of users spoke to a financial adviser, tax adviser or accountant in the three to four months following their appointment, compared to 20% who did not have a guidance appointment.
Protecting pension savers is the aim of guidance, but that goal will also help foster a positive public perception of financial advisers and the wider pension freedom agenda.
This article was written for International Adviser by Stephen Lowe, group communications director at Just Group.
