The workplace sector is in the midst of a huge policy shift in terms of the assistance which can and, in some circumstances, must be offered to scheme members. The initiatives include investment pathways, which are already up and running, with the forthcoming pension bill promising legislation to offer guided retirement solutions.
Meanwhile led by the FCA, there is a significant amount of work being done to adjust the boundary between guidance and advice, with targeted support arguably the most significant component for the pensions sector.
Aegon head of corporate affairs Steven Cameron considers how the jigsaw pieces could fit together. He says: “The vast majority of auto-enrolees don’t have access to advice, so those advisers and EBCs supporting employers could consider targeted support as a new service there.
“This could cover everything from suggesting adequate contributions, considering alternatives to the default fund, consolidating other pensions and helping with decisions approaching and into retirement.”
Such support could also be linked to investment pathways. “Investment pathways currently help individuals consider what might be an appropriate investment based on high level plans for their retirement. There are parallels here with targeted support which will suggest courses of action to customers grouped by common characteristics. We could see targeted support lead to enhancements to the investment pathways process.”
In addition, and though neither are up and running, he thinks the expected requirement in the pension bill for schemes to offer a guided retirement solution may eventually learn from targeted support.
“Decumulation is highly personalised and the ‘right’ approach will depend on factors such as health, whether the member wants to provide for a partner, attitude to risk and what other pensions they have. This means no single solution will be right for everyone and trustees will need to find ways of placing members at retirement into different groups before offering a guided retirement solution. There could be valuable learnings here from targeted support.”
A need for change
Martin Willis, partner at consultancy, Barnett Waddingham says: “The starting point is that the current situation is not acceptable.
“Auto-enrolment and the pension freedoms can be a huge positive for later life saving, but only if people make informed decisions. Avoiding risk of poor or even catastrophic decisions is the main issue, before we get to helping people make optimum choices.
“At present there is a significant gap where only those with significant wealth access advice, whilst those who need it most struggle. Much is being made of the pros and cons of the Mansion House Accord, but a far bigger risk to certain groups is the risk of poor individual decisions – for example switching out of investments at a time of market volatility. Better defaults improve member outcomes, but don’t prevent potentially catastrophic individual decisions.”
No panacea
Julie Hammerton, managing partner at Hymans Robertson Personal Wealth says: “Targeted support is unlikely to be the panacea to the retirement challenges we face in the UK, but it is a step in the right direction. The issue, though, is that there is so much variability in terms of what people do with their finances when they reach retirement, or what they need their finances to do for them. Everyone’s financial and life situation is different. This means they’ll either want to or need to take their retirement income in different ways.”
“Defaults, however, are better than the status quo where we have too many people making poor decisions at the point of retirement, such as cashing in their pensions.
Pathway challenges
“A fundamental challenge with default retirement pathways is a provider’s default can only optimise for the pension pot they control, whereas most people’s pensions will span multiple providers. They also can’t take account of non-pensions savings. It’s like trying to create the perfect diet plan while only knowing about one meal, or potentially just a snack, in a person’s day. For targeted support to be a success, getting pensions dashboards up and running simultaneously will be key.”
Hammerton also stresses the importance of a consistent investment strategy as someone moves through and into retirement.
“Pre- and post-retirement investment journeys should tie up. Again, that’s why it’s vital to get individuals to engage much earlier in the process, so that they don’t have a poor outcome, for example putting them in a lifestyling pathway that assumes they’re going to buy an annuity, when in fact they have other savings that are a source of guaranteed income, and growth assets could have been a better option for that individual.”
In terms of the connection to pathways, Tom Barton, partner and head of the national defined contribution practice at Pinsent Masons: “It’s certainly anticipated that retirement journeys will be supported by targeted support. Less so investment defaults in accumulation.”
“This is all part of an overarching process involving other proposals to get more people to invest rather than leaving money in savings accounts etc. There may be other adjustments to regulated advice, but the targeted support is the most relevant change for workplace pensions. And it may dovetail with other workplace pensions initiatives such as investment pathways and income solutions which are expected to be addressed in the upcoming Pensions Bill.
“However, the fundamental question is whether this will allow employers, trustees, and pension providers to give more help to scheme members regarding pension and retirement choices, or whether legal and regulatory obstacles remain.
“If some of the uncertainty can be addressed, this reform will probably equip pension providers to help members more.”
Asked whether the broader advice/guidance boundary will impact member outcomes, Hammerton adds: “The AGBR is likely to impact member outcomes positively, but not to the extent that we need to see an improvement in outcomes.
“The statistics on retirement savings levels are sobering. So many people will struggle to sustain even a moderate standard of living in retirement. The main driver behind this is inadequate savings levels. The second driver is the decisions people make when they get to retirement. Current proposals focus on the latter, so targeted support as it stands today with a focus on retirement won’t address the much broader issue of people not saving enough in the first place.”
Willis says: “The proposals rightly target this [advice] gap in a sensible manner, and will assist members, but the extent to which it is successful will depend on several factors. Identifying the right areas where targeted support could be provided is key. There are such diverse circumstances at play, any solution needs to be targeted at carefully considered scenarios. These are likely to be around the choices people can make: how much to contribute, how to invest and how to take benefits, with the last being a huge risk as many decisions are irreversible, such as withdrawing funds in one go and the tax implications of this.”
Can AI work where robo advice didn’t?
Advisers note the failure of robo-advice to date but are more optimistic about Artificial Intelligence developments.
Hammerton says: “As robo-advice and all other digital engagement initiatives have shown, digital initiatives to date have rarely worked. Ideally engagement should be in the form of a conversation. Given everyone’s situation is different and given the low levels of financial literacy we see in the UK, people want to talk things through with another person. Fortunately, tech behind the scenes is making human-led support more do-able – particularly in a guidance setting.
“In the near term, there is significant opportunity behind the scenes. Technology, particularly AI, can significantly reduce the cost of delivery of human support, whether that’s in a guidance or advised setting.”
Willis adds: “New technology will be essential. In part, we think it can unlock a shift in the language used to engage members, away from investment and towards budgeting/spending needs, which is much more familiar to the average person.
“In addition, dashboard functionality/pooled data is critical to this initiative. AI also has a part to play – we’ve been talking about ‘robo-advice’ for decades, but given this support is procedural by necessity it makes sense to look at ways to automate it to hit the required level of efficiency to achieve scale. Yes, there will be risks around data security and suitability, but these exist anyway and the requirement to get processes right should not be a barrier to innovation given the benefit it can bring to the groups that need it the most.”
Barton adds: “The risk for members is that they might still be better served by ‘full fat’ advice, rather than targeted support.
“The risk for the industry is that solutions which members are steered towards could prove to be sub-optimal, for whatever reason, and then members and regulators would hold providers to account. Targeted support relies on members being segmented and having solutions matched to specific scenarios. It’s possible that this segmentation, solution, scenario process could be challenged. The question will be whether the recommendation was right based on what the provider knew. The industry also faces the challenge of the boundary between targeted support and ‘full fat’ advice is not as clear as it could be.
“FCA-regulated providers will have their own sets of risks and issues to consider. Trustees and employers, who do not have existing advice in place or FCA permissions, will need to think very carefully about the extent to which they are promoting targeted support, providing access to targeted support and what that means from a data, responsibility, and liability perspective.”
Willis adds: “Ensuring guidelines for the provision of support and in particular that providers are offered adequate protection – providers will be reluctant to engage with this unless they believe the risk of individuals looking to them for future recourse has been mitigated.”
Hammerton notes that in terms of the risks, the FCA “recognises that consumers won’t necessarily achieve the best possible outcome under targeted support. It’s a case of not letting the quest for perfection get in the way of doing something that’s better. There is no ‘one size fits all’, even for consumer segments or scenarios that a provider may define.
“One risk of the proposals relates to the FCA expecting firms to define the specific scenarios where targeted support could be delivered. A consequence of this is that it could undermine consumer trust in default pathways if different providers are making different recommendations. In any case, with so many people having multiple pension pots, they may receive different suggestions from their various providers.
“This could compound consumer confusion and disengagement even further.”
