PensionsAug 26 2014

Pensions: As you like it

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Pension scheme members are not happy. That was the key finding of one survey last month, revealing that just 45 per cent of members of UK defined contribution (DC) pension schemes were content with their schemes, compared with 65 per cent across the pond in the US. Worse than this, only 26 per cent of those in the UK thought their DC savings were sufficient – an observation that the government would agree with, having just declared that nearly 12 million people are not saving enough for their retirement.

What is surprising in the survey of scheme members by State Street Global Advisers is not that the numbers are so low, but that members are sufficiently switched on to recognise the predicament they are in. One conclusion is that the considerable publicity around pensions generated by the government’s reform programme is having some impact on the general public. Whatever conclusions are being drawn by the archetypal man-on-the-street, savers are at the very least being prompted to have a second look at retirement planning – and they are not happy with what they see.

Open arms

Advisers should welcome this, as they should welcome the guidance guarantee that is part of the government’s package of reforms of pension savings. The message that the majority of people are not planning their retirement early enough and not contributing enough is finally starting to get through.

Some experts have voiced the concern that auto-enrolment will have the opposite effect and work against this trend. If the entire process is automated, the argument goes, fewer people will monitor their pensions, not more. But by dangling the carrot of a lump sum which investors can get their hands on come retirement, everyone seems to be taking notice. That can only be a positive development.

This trend will be reinforced by the free helpline or advice centre, which is the subject of an ongoing government consultation. A further survey last month, this time by Mercer, found that 62 per cent of employers and trustees plan to offer additional support on top of the free generic advice. In a separate development, the government will soon require anyone planning to transfer out of a defined benefit (DB) scheme into a DC scheme to take independent advice, with the employer paying if it is within the same scheme or at their suggestion. Is this the dawn of independent financial planning for all?

There is no doubt that these new developments in combination are generating significant interest in pension planning. That interest will soon turn into the requirement for financial planning advice. The main catalyst for this will be the free guidance.

In the consultation published in July, which sets this out in more detail, the draft looks promising. Members taking advantage of the guidance will be required to clarify the details of their various pension arrangements, along with their tax affairs, other investments or savings and income requirements. They will then go through a generic tutorial about the options available to them – annuities, drawdown, cash lump-sums – with basic suggestions drawn out. At this point the saver will be told that in order to get more detailed advice, including product recommendations, they will need to use an independent adviser, with a directory provided.

Changing times

This picture is subject to change, but at this stage it seems clear that the firms providing generic guidance –the Money Advice Service or similar organisation – will take away much of the laborious, unproductive fact-finding and education work that an IFA would otherwise have to do themselves.

Gone is the need for potential clients to rummage around, digging up all their old paperwork, with the adviser being blamed for making the client do all the hard work. This should already have been done. Gone is the need to go back to basics in every single conversation – a time consuming and unprofitable process. In theory at least, clients should arrive at the adviser’s door clued up, paperwork in hand, armed with a government-stamped blueprint of a retirement strategy, ready for their personal recommendation.

Arriving at the IFA’s door for the final, rather than first, stage of the process could mean the saver is prepared to pay out a smaller fee for this part of the service. But sophisticated clients are immeasurably preferable to unsophisticated ones, and if the guidance programme does its job, the individuals arriving on your doorstep will be significantly further up the learning curve than they would have been otherwise.

IFAs who are geared up for these customers (who will have a much better idea of what they want than is currently usual) will be able to provide a streamlined service. The focus of this service should be a high standard of due diligence of products and providers and a wide database of options. IFAs can combine a vigorous analysis of conventional annuity, drawdown and other products with out-of-the-box suggestions that are unlikely to have cropped up in the free guidance conversations (such as structured products, investment-linked annuities).

Clients who understand the basics are more likely to be convinced of the benefits of more complex options: start from stage one and the conversation is unlikely to progress much past stage two. But in order to benefit from these developments, the advisory proposition for new clients in the wake of the reforms may need to alter.