The key questions on the Budget ‘guidance guarantee’

With warnings that people will splurge their windfall at retirement on fast cars or cruises, or simply choose inappropriate options, the need for pensioners-to-be to be helped through their retirement choices is striking.

Mr Osborne knows this, hence why from April 2015 a ‘guidance guarantee’ will be introduced. It is currently in a consultation phase, but as it stands individuals approaching retirement will receive “free and impartial face-to-face guidance to help them make the choices that best suit their needs”.

This is all well and good, but since the announcement of the plans in March many commentators have lined up to point out flies in the ointment.

Andrew Tully, pensions technical director at MGM Advantage, warns “providing the guidance is a massive job and there are many issues which need to be resolved”, including the not insignificant questions of who should provide the guidance, how it should be administered and what it should actually cover.

The ‘who’: Problems with impartiality

Mr Osborne wants providers to deliver the service. This has been met with howls of derision in some quarters as advisers - and even the odd provider - cite the logical fallacy of getting a provider with skin in the game to deliver an ostensibly impartial service that will ultimately define an individual’s product choice.

Both Adrian Boulding, pensions strategy director at Legal & General, and Mr Tully do not believe providers should be part of the guidance service.

Mr Boulding says: “Clearly providers are not impartial – we are interested in the outcome, hoping that the customer will buy our products.”

Both believe this should fall onto the Pensions Advisory Service, the Money Advice Service or financial advisers.

However, Mr Boulding adds the providers “do have a role to play in providing clear explanations of the products on offer”.

Tom McPhail, head of pensions research at Hargreaves Lansdown, believes while pension providers, schemes and insurers “will be responsible” for the guidance come April 2015, the service could in theory be delivered by “multiple agencies” - “basically anyone willing to conform to the FCA guidelines”.

Mr McPhail is, by the way, another of the doubters of providers performing the task, warning they “may be tempted to roll their existing pension customers over into drawdown”.

He says: “It is essential that the FCA and the politicians are vigilant as this poses a significant risk of consumer detriment.

“If an insurance company wants to roll a customer over into drawdown, they must be held responsible if that individual subsequently mismanages their pension pot. If not, this could be a recipe for wealth destruction.”

Mr Tully adds: “We have the chance to build a system that really helps customers make the best decisions around their retirement income, but it needs to be independent so there can be no accusations of vested interests taking priority.”

The ‘how’: Facing up to face-to-face costs

The Budget promised guidance for everyone with a defined contribution pension, however Mr Tully believes to manage the cost - which is going to ultimately fall back on consumers, especially if the service is under the purview of providers - this should be an offer and not a compulsion.

He says: “An auto-enrolment process where people are pushed towards guidance but have the option to opt-out may be an ideal solution.”

This fits with statements from the Treasury Select Committee, which used more equivocal language in its Budget report and said there should be “an initial opportunity for face-to-face guidance”.

Moreover, while the government pledged to give everyone face-to-face guidance, all commentators do not think this will be suitable, or at least necessary, for everyone.

Mr Boulding says: “I don’t think the guidance needs face-to-face for everyone. To insist that guidance is given face-to-face would involve over 200 plus conversations per day and an army of support staff to deliver this.”

He envisions a spectrum of delivery options, which start with the internet “and progressing upwards through web chat, telephone Skype or other remote processes with face-to-face becoming only one of the options available”.

“People would seek guidance in a way that fits with their lifestyle, at a time that suits them and this would start earlier in the pre-retirement process.

“That would mean most people accessing their guidance remotely, but with MAS or TPAS arranging face –to-face guidance where they are not satisfied that the customer has understood the key points over a remote delivery.”

The ‘what’: Everything but a decision

Paul Smee, director general of the Council of Mortgage Lenders recently said the face-to-face guidance could be as short as 15 minutes, warning this would fail to cover important financial issues.

So what should the guidance contain? More importantly, what should it not contain - specifically, should the guidance eventuate in a recommendation?

In its response to the TSC Budget inquiry, the Financial Conduct Authority warned those giving guidance cannot advise customers what their final product should be but “what it can do is tell people the implications of various decisions”.

However, a survey conducted for the National Association of Pension Funds found that close to a third of people want the service to be “face to face, independent advice”.

A recent survey by Unbiased also revealed that 30 per cent of consumers would prefer the guidance to include a guarantee “that what they are being told is right for them”, while one in five actually wanted specific advice on what they should do with their money.

Mr McPhail agrees the guidance will be mostly technology-based and envisages something akin to decision trees, which are often used in non-advised services, but are often the subject of debate over where the line into advice falls.

He adds: “It will be relatively superficial, involving more telling than asking, with the provider of the guidance, walking the customer through a series of subject areas but without any deep interactive question and answer processes.

“The sort of areas the guidance will have to touch on include health, assets, liabilities, dependents, risk tolerance etc.”

Mr Tully says the service must “help people with actually deciding upon a final solution- and how/where to buy”. He adds that much of the guidance will be around the tax implications of when and how to take benefits.

“While you can take a lump sum, for most people it’s not as straightforward as just taking all the pot out at once as that may result in a high tax bill.

“People will also need help understanding how long they have to live, and even if we give them an average life expectancy, an average is just that – meaning a great many people will live longer, some considerably so and we need to make that clear.”

The elephant in the room

Each of these questions ultimately revolves around cost, and who is going to meet it. How extensive the service is, who provides it, how it is delivered and the acceptance or otherwise of liabilities all have cost implications.

Mr Osborne made it clear that he wants the guidance to be free at the point of receipt, which the TSC agreed with in its report. The reality, according to Mr Tully and others, is that “someone will have to pay [at the point of receipt] and that will either be the government or the industry”.

A survey conducted by the Napf revealed few savers are prepared to meet the cost of advice themselves, with not one prepared to pay £500 for retirement advice.

Mr Osborne placed the onus on providers in the Budget and gave the FCA £20m to get the process started, with consultations already underway with trade bodies and others on draft plans. There is no suggestion that more central government funding will be forthcoming.

Some have said this could mean a levy on the industry will be required, others that it will be met out of increased charges. Either way, it is a far cry from the fuller free service first described and there will be demands for full transparency.

For advisers, perhaps the ultimate benefit is this will finally put the cost of your services in perspective.