With over 20 million people in DC schemes these days, you might think that pensions are the top priority for any firm looking to bring advice to the masses. With Mercer Money already signed up, Hub Financial Solutions is now launching a new low-cost advice service it says is a market first in that it is a genuinely fully automated retirement advice solution.
Before this latest Mercer deal, Hub already had a big footprint in the corporate pensions space, where it has for years provided at-retirement guidance. It was amongst the first in the DB transfer market and has transacted over 50,000 cases in the space, and has recently acquired 75 per cent of Corinthian Pension Consulting. For David Cooper, CEO of Hub and group marketing director of Just Group, a pension is just another piece of the jigsaw, and that retirement is about much more than simply turning a pension into income. “One of the things that we recognised fairly early on about DC is that whilst there’s lots of them and the pots are growing, they are relatively small pots compared with the DB equivalent. So what we started to focus on is recognising that retirement for most people in the masses is about their money, not about their pension.”
Cooper’s point is that for people saving in DC schemes, Isa holdings are often more significant than pension. At the end of 2018-19 the market value of adult Isa holdings in UK stood at £584bn, outstripping DC pension assets.
And it’s not just cash in the bank and property that should be influencing how and when retirees should draw their DC pots.
“We can see from the data that there are many, many people that have got some income from work, even though they said they retired two years ago,” says Cooper. Failing to take all these factors into account in the way that current guided exit routes from DC schemes do, will result in overpaid tax, inefficient withdrawals and sub-optimal investment structures, believes Cooper.
He says: “You need to take an aggregate view of the customer’s money to make sure that you’ve got a true picture of what they can and can’t afford to do. If you simply look through the pension lens, you will not get a very pretty outcome for the majority.” Hub has its origins in TOMAS – The Open Market Annuity Service – which was the biggest independent at-retirement guidance service in operation a decade ago. In 2017 the business changed its name to Hub Financial Solutions and is now launching its post-pension freedoms offering to the world in the form of Destination Retirement, a financial planning service that gives tailor-made advice on your retirement at a lower cost than traditional financial advice.
“The system encourages the customer to think about their retirement goals in real terms – non-monetary terms, what they need and what it might cost them,” he says. “We then put all this data together and the algorithm suggests how that money is used most efficiently to meet those goals.”
It’s easy to understate the importance of tax efficiency in withdrawals, argues Cooper, a factor non-advised structures cannot fully explore.
“How you use the money from those wrappers through those allowances can make quite a difference to what you can afford over the next 20 or 30 years,” he adds.
It’s not just an individual’s other assets that need to be taken into account, says Cooper. While guidance, or streamlined digital advice will only scratch the surface of the way couples’ finances can work in harmony, fully-advised solutions can create even more efficiencies by using partners’ allowances.
“Rarely does retirement planning happen for couples simultaneously. When you go and sit down with an adviser, they will ask you about your partner’s plans. But digital solutions tend not to. So what we have done is put the whole piece together so it does the planning for both simultaneously. This can mean even greater benefits as capital gains allowances can be transferred from partner to partner easily.”
The algorithm behind this ongoing advice service constantly adjusts the advice as asset values change and withdrawals are made, making it an ongoing product. One of the advantages for employees of workplace advice propositions is that they have had a consultant or corporate adviser kick the tyres on the proposition to check it’s not overcooked on price. So will consultants thinking of recommending Hub as an add-on to a workplace pension scheme think it’s worth the money?
“The proposed charging structure, although it does vary by partner, is 75 basis points. But we stress that we’re expecting to be servicing the segment of customers broadly below where traditional advice cuts in. So our target customer has between £30,000 and £150,000 of investable money,” says Cooper.
That means an annual charge of £225 for investors at the bottom end of the target group, for full advice for which Hub is on the hook. Platform charges are 20bps and funds, which are from BlackRock, come in at 15bps. The initial up front fee is £299.
“It comes with a strong encouragement to use our customer handlers by telephone,” says Cooper. “So there’s obviously a cost of managing the service with highly competent people.”
Cooper also believes advice can help make sure people’s money is invested where it should be – as highlighted by the FCA’s research that too much long-term money is held in cash.
“There is a huge number of people that think cash is the right place to have their money for the next 30 years. And obviously, even without negative interest rates, you’ve got a negative real return on cash. And there’s a reasonable chance of inflation spiking at some point because of the amount of money that’s being pumped into the economy. So we have a hell of a lot of people with their money in exactly the wrong place.”
Cooper argues that financial advice in the workplace can be a valuable human capital management tool for HR directors.
“Big corporates in particular will have many, many people who can afford to retire, perhaps because they were in DB until 15 years ago and then they’ve been in a well-funded or well contributed-to DC scheme. But no one’s getting the message across to them that they can retire because removal of the default retirement age and mandatory retirement means mentioning this in the workplace is discriminatory,” he says.
“Or to say ‘if you went to two days a week now, starting to augment your income with some of your savings then isn’t this going to affect your overall retirement prospects because you’re still contributing’. You can see how scheme trustees might want to help members get to this point rather than just leaving them on their own and being put at risk of being scammed.”
Cooper sees Destination Retirement as a significant step for the organisation. If it gets as much traction as its predecessor TOMAS, it will make serious inroads into closing the advice gap.