The Financial Conduct Authority has launched a consultation in response to the retirement reforms which promise all DC scheme members access to free and impartial guidance at retirement.
The government has given the FCA a formal role in setting the standards for delivery partners, maintaining these standards, monitoring compliance and collecting the levy which will fund the provision of the ‘guidance guarantee’.
It has proposed a suite of principles-based standards, which those delivering the guidance guarantee will need to comply with, as well as consulting on changes to the FCA handbook to take account of the reforms.
Cutting through the consultation, here are the five things I think are most interesting:
Timing of signposting is adequate
“Providers will be required to signpost the customer to the guidance between four and six months before their intended retirement date and to remind them of this at least six weeks before the intended retirement date,” reads the document.
Given industry calls for guidance to begin up to 10 years out from retirement, this ‘wake-up pack’ may be too late to prevent pension savers from sleep-walking into not making the most of their accumulation stage.
The consultation admits that there was a lot of discussion at workshops and in responses to the Treasury’s original paper about signposting. The FCA added this is something it will continue to consider as the delivery model develops.
Call me cynical but it will be too late by then. We have one opportunity to get this guidance right and if it is blown, perhaps by not offering the guarantee earlier, the trust in the industry will once again plummet.
Too much information needed
As the document points out, to get the most out of the guidance session, the consumer will have to provide a certain level of financial and personal information to make the output more helpful to them.
The FCA suggests that this should cover financial information like: other pension pots or benefits; spouse or partner’s benefits or other income; current and future sources of income; capital expectations; tax status; state benefit entitlements; debt position; and whether the individual is a home owner or renting.
In addition, personal circumstances should be taken into account, including: dependents; spouse or partner; state of health; and potential long-term care needs. Guidance should then alert consumers to areas they may not have considered, like longevity and the danger of running out of money in retirement, the possible impact of state benefits and possible healthcare needs.
But how long will this take? It was previously suggested that by the Council of Mortgage Lenders that the guidance session will take 15 minutes. It would take longer than 15 minutes to cover the above let alone to then explain about ‘at retirement’ products.
More than one session is needed and the process should start at least 5 years before retirement.
Guidance limitations
“The guidance will not tell consumers what to do, in terms of the specific action to take in their circumstances, nor will it recommend a particular product, provider or adviser,” notes the paper.
This comes at odds with research showing that consumers want more than guidance at retirement, preferring to be told what to do in a full advice session.
A survey of more than 2,000 adults for adviser referral website Unbiased revealed that 29 per cent would prefer the guidance to include a guarantee “that what they are being told is right for them”, while a further 24 per cent said they would like the service to include specific recommendations on which option is right for them.
The difference between guidance and advice needs to be clearly stated, and consumers expectations should be managed to ensure they recognise they are responsible for making their own decisions.
Changes to the open market option
The FCA is proposing changes to clarify the retail client’s open market option, making sure that information about an individual’s options include the current value of their pension fund and whether there are any guarantees that apply to the pension.
It proposed an amendment to its rules making clear the ability to shop around applies to any of the options - annuity, drawdown, etc - an individual has.
The regulator is carrying out supervisory thematic work on how pension providers are selling annuities to existing customers, with initial findings suggesting that although the market has changed for the better, many of the initial concerns around unfair selling techniques to retain customers still remain relevant.
Paying for the guidance
The FCA admits that it has not undertaken assessment of the costs at this stage and is seeking views on provisional proposals, with draft levy rules to be discussed during the annual fees policy consultation paper in October.
It will use the existing ‘A’ fee-block framework, made up of a series of fee-blocks under which the relevant firms pay annual periodic fees to the organisation, with three options proposed for how to allocate the levy across the five retirement guidance fee-blocks.
The paper also stated that the firms contributing to the retirement guidance levy “should, as far as possible, be those that would potentially benefit when these consumers go on to purchase the financial products and services supplied by them.”
All firms will pay a minimum fee, which is currently £1,000, except in the case of smaller credit unions and smaller friendly societies, who pay lower minimum fees depending on their size.
The Pensions Advisory Service, as well as the Money Advice Service, have been recommended to deliver the guarantee. Tpas previously revealed the guidance could be delivered virtually at an average of £35 per session. The ABI previously estimated the cost to be £36 per person.
Whatever the real cost is, the levy will run into the millions.
