The Chancellor George Osborne announced at the Budget 2014 that, from April 2015, all savers aged 55 and over will be offered free, impartial face-to-face guidance on their retirement options. This will be the most material financial decision the majority of us will ever make by determining which financial institutions will pay our retirement income for the rest of our lives and the level of that income.
There is clear evidence of a knowledge gap around retirement planning, which means that education should play a key part in our effort to improve retirement outcomes. The Government has yet to decide whether this will be provided via the State, the pension provider, the employer or all three. However, we feel that intermediaries would be equally well – if not better – placed to provide guidance to scheme members. Intermediaries offer the double advantage of being completely independent and cost-effective because guidance can be easily integrated to the service they already provide and they already have access to some key information about the pensioners to be.
Basic guidance is an important first step towards achieving an optimal retirement outcome, but it should be further supplemented with expert advice, as in the words of Professor David Blake of the Pension Institute, “the optimal running down of assets in retirement is extremely complex. A minority of individuals might be able to manage some of these risks on their own, but this is a risky and high-cost strategy.”
In light of this, the findings from a recent survey by JLT Employee Benefits is a cause for alarm. It found that the majority of people who are not confident about their ability to make financial decisions are either indifferent to, or outright against, consulting a financial adviser at retirement. What this tells us is that whilst the vast majority of us could use some professional advice, few will seek it in reality and it is likely that many people will be worse off as a result.
This could become a massive drain on the UK Government as the same survey from JLT found that 72 per cent of respondents are planning to fall back on the State if their savings are inadequate. There are approximately 400,000 retiring from DC schemes each year.
Clearly, this reluctance to consult financial advisers arises mainly from the associated cost and although for most people – except those with a very small fund – this will lead to a positive outcome, the general perception is that paying for financial advice is only worthwhile if you are a high-net-worth individual. This means that until we manage to change this mentality, if we want to improve pensioners’ financial positions, the free guidance has to be more than basic.
And here walk in the employers, who could potentially play a huge role in supplementing the basic guidance. However employers are in fear of being sued if they offer retirement advice. Should the Government remove their liability risk, this will encourage them to play their part in helping savers plan for their old age adequately.
It makes sense that the provision of financial education, information and advice is integrated into workplace pensions and to work in groups when the topic is likely to lead to generic questions, as suggested by Steve Webb. This guidance would be best structured by utilising the efficiencies of technology, for example through the company’s online benefit portal. Information will be best received in bite-sized form and modelling tools will also be useful in allowing individuals to make an informed choice when they are asked to assess retirement options. However, as stated above, professional advice could still be required.
There is also something to be said about when guidance should become available. The majority of employers responding to the JLT survey – 57 per cent – believe that guidance is needed at least five years before retirement. Access to guidance before retirement enables employees to take action in the accumulation phase before it is too late. We recommend the educational material should be available as early as from age 55. Nearly all employers – 92 per cent in our survey – believe that members will need guidance on more than one occasion, with 62 per cent indicating that guidance will be needed both before and after retirement, to have a real impact on member outcomes.
The good news for the Government is that nearly two-thirds of employers, 63 per cent, think that the cost of additional support and advice should be borne by employers, although, for 35 per cent this is conditional on the cost being tax deductible. Take a hint.