There are two fundamental things that I think the guidance guarantee must deliver, and these are absolute deal breakers for me: it must tempt people to participate and everyone who needs to know about it, must know how to get it. If we are left with only a small minority of customers using guidance it will have failed, and will bring back into question the liberation of pensions that it accompanies.
Some providers may disagree, but I think it is in everyone’s interests to work with, rather than against, the flow of government policy and ensure that take-up of guidance is as widespread as possible. Hundreds of thousands of people need it, and having created it (spending time and money devising the “right policy”) it would be ludicrous if everyone involved didn’t actively promote it.
Clearly, a key priority for government is to get the guidance “up and running” from April 2015. But it must also work out how to drive demand. We think the latter is a job for everyone involved – not government alone. To ensure success we’ll need a troupe of ambassadors: government agencies, product providers, consumer groups and the media too. And we believe this widespread recommendation will only materialise if the service is truly impartial and independent.
However creating a well-established guidance service is not enough on its own. The journey to retirement is a long process, and it’s crucial for guidance to be available at the right junctions along the way. This means a few existing processes will need to adjust.
If people approaching retirement can access their pension benefits from the age 55, it makes sense for industry – pension providers and the DWP alike – to highlight guidance options in all communications when customers are coming in to their fifties. Furthermore a government-led advertising campaign could be targeted at them – in the same vein as DWP’s “I’m in” auto-enrolment campaign. Although the latter would land a vast dent in the £20 million budget Government has earmarked to get the guidance “up and running”.
The next six months are crucial, and there are some obvious things to avoid. Following the Chancellor’s ground breaking announcement, any of the following would be a disaster: delivery delays, failure to launch or a lacklustre take-up from customers. Assuming we can overcome these pitfalls, what outcomes should customers ultimately expect?
In order to capture the consumer imagination, we need something that will get cut through and engage customers in a topic which lots of people find inaccessible and confusing. We also need a service that journalists and commentators will be happy to recommend to their audiences / readers. I see four success factors for a Guidance service that truly works in the interests of the public:
Guidance should lead to a greater take up of regulated advice
There will be customers who, along with their financial adviser, have robust plans for funding their retirement. They should review their plans in the light of the new freedoms announced in the Budget but in the main, for customers with a strong relationship with an adviser, it is reasonable to expect the adviser’s service to fulfill the role of guidance and much more. However there is a real prospect that many people who have been through guidance will find that their needs are more complex than they initially thought, or that they don’t know which of the new flexible retirement options best suits their circumstances. These are people who would benefit from proper financial advice. There will be many people in this category who would not normally consider using a financial adviser but who would benefit from advice at the point that they are about to make decisions about their future income. Guidance should be a rich source of referrals to advisers. We have argued that the regulated advice available “at retirement” should be more focussed than a full advice process. Wherever possible it should use the data collected during the guidance process. What we would like is a specific form of advice designed for at retirement customers which can be delivered to high standards but with significantly reduced costs.
Guidance should result in debt levels getting lower and more people taking up debt counselling
Guidance is likely to identify many customers who have high levels of debt as they approach retirement. For many people in this situation, using some of their pension funds to pay off their debts can produce a better outcome in retirement, and for some, debt counselling may be appropriate. If we are doing Guidance right, we should see an impact on debt.
Guidance should encourage customers to shop around for the best deal. This will mean that providers have to abide by a three-month “prohibition” period before they are allowed to approach customers to try and sell them their own products.
We have seen from studies by the FCA and the Consumer Panel that industry initiatives to encourage people to exercise their open market option in purchasing an annuity have failed to breakthrough with the average customer. The majority still opt for a standard annuity with their current provider which in many cases is lower value than they could have achieved by shopping around. Customers need more encouragement to shop around, and we think that a prohibition period applied to the direct to consumer operations of providers would help. Any provider who is enlightened enough to bring the ability to shop around to their customers by providing an open market service with access to the best products offered by their rivals, as well as their own products, would of course be exempt
Guidance would be best provided by a new not for profit organisation with a single focus.
Experience with the Money Advice Service has shown that organisations providing financial education or guidance can be a prime target for political interference. It is important that the provider of financial guidance should be accountable to customers but not a political football. We think the organisation delivering guidance should be a not for profit mutual organisation funded by a levy on industry preferably, the same levy that funds MAS. Any surplus it makes could be used to research how to make financial guidance an increasingly successful lifelong experience.
The budget has given us all a real opportunity to change things for people coming up to retirement. It’s a huge opportunity. We mustn’t mess it up.