The guidance question

The Chancellor wants trustees and providers to give everyone guidance on retirement –  so what role will advisers and consultants have in the process? John Lappin investigates

The Budget pension revolution raised a huge number of questions for corporate advisers. One of the most crucial ones is what role, if any, employee benefit consultants and corporate IFAs will play in delivering the guidance guarantee.

This is, of course, the official guidance guarantee following clarification that it was not quite the free, impartial face to face advice mentioned by Chancellor George Osborne in his Budget speech. But whatever form, there are now under 11 months before such guidance is meant to be available.

The debate about what form this guidance should take is certainly a lively one. Opinion divides on whether it needs to be delivered face to face and which organisations should be responsible for delivering it.

The current thinking is that trustees and providers will be expected to shoulder some responsibility and/or cost, though how this will happen is still very much up in the air.

Apart from the hoped for launch next April, guidance is currently subject to consultation but only as part of a broader Budget consultation due to end on June 11th. Political experts believe the DWP and Treasury will present some ideas swiftly after this so guidance legislation can be included in the Queen’s Speech but corporate advisers are worried.

PTL managing director Richard Butcher says: “Every moment that ticks by is a moment less to devise the delivery mechanism. They are telling us as trustees that we will have to deliver this from the 6th April 2015. I am getting quite nervous about it.” he says.

LCP principal Andrew Cheseldine says: “It started off as free impartial face to face advice, within 24 hours it was guidance. A Treasury deputy director now says it isn’t face to face. It isn’t free because someone is paying for it. But if it is TPAS or MAS it is funded by taxpayers. Will they let someone put in £2700 into a stakeholder to get relief and take out £3,600? I would argue it isn’t impartial no matter how you do it.

“Most trustee bodies are saying we’ve got to pay this, how does that work? Providers are saying ‘but you have hit us with a charge cap’.”

Cheseldine wants to know if TPAS or MAS do provide the official guidance, what do trustees do in terms of providing close to retirement seminars. “And could it even mean the likes of L&G and Standard Life can’t write to members about their retirement?”

Butcher’s view is that providers are well placed, as most already provide pre-retirement information in some form already. The difficulty, he says, is that guidance has to be impartial and the pension minister Steve Webb thinks it is incompatible with providers.

“I take a different view. Providers could do a good job of it and we could get management information to make sure they are not skewing things in their favour. Or providers could just use a different mechanism for the last part of the pre-retirement process.”

But there are arguably bigger challenges for trustees. He says: “As a trustee of a DC scheme, we don’t have any money. We have either got to take it from the fund or ask the employer. If we ask the employer, it will cause regulatory arbitrage because the employer will say trustees are asking me for £50,000 to give guidance while with a contract based scheme, the provider picks up the tab. The idea of trustees taking the money out of the pot appears to run contrary to the idea that it is free even though that would be more consistent.”

He also points out that members are not compelled to take the guidance offered by the guarantee, but if it comes out of the charges, everyone will be paying for it.

“These are not insurmountable problems but in the context of the language being used, something has got to give.”

Butcher says it is possible that members will be given a voucher with trustees directing members to sources of guidance or to advisers. But he adds: “I can’t do that without doing due diligence, but also there is only £100, £150 quid to do that. What IFA is going to get out of bed for that? And guidance is one thing but the moment someone asks a question, it gets closer to advice.”

MGM Advantage pensions technical director Andrew Tully supports a centralised system: “A customer may have several pots. If the workplace scheme talks about one pot, a provider about another, that doesn’t seem like a good outcome, so we need a centralised solution from an independent organisation such as TPAS. That doesn’t mean schemes can’t give guidance and communication too. The more the better, but meeting the guidance guarantee is best delivered centrally and consistently and it takes it out of providers’ hands. It needs to be impartial and it needs to be seen to be impartial.”

Yet Butcher does not believe TPAS is the right place despite having worked as a TPAS adviser.

He believes guidance would best be paid for out of the assets of scheme and probably paid for within the charge cap.

“It could be paid for by trustees, handled by the provider, which would be monitored to see they are not biased, but government and regulator should accept it may not be face to face but telephone, Skype or a group session.”

One firm that offers both private client financial planning and employee benefits suggests that it will need a synthesis of the two.

Broadstone’s retirement services director Matthew Brown says that the sheer quantum of people reaching retirement means the voluntary sector is being very ambitious saying they can fill the gap while providers will struggle to make it look as if they are not trying to make a sale.

He adds: “Financial planning firms are used to delivering this sort of advice for a fee, but the profession is small in number. EB firms enroll large numbers into pensions but don’t take people through these life changing decisions. 

“The solution should have financial planning at its core but not be delivered by financial planners. The delivery would have to be in a very structured way and EBs have the project management skills. The planning side would provide the intellectual capital of what should be discussed and how. It doesn’t exist at the moment, but I think commercial organisations will come to the fore offering it.”

In terms of cost however, Brown says that the £20m would be swallowed on feasibility studies before anyone gets any advice or guidance and it will require a levy.

Syndaxi Financial Planning director Robert Reid says: “I don’t think there is one single way that is appropriate. There will be a variety though if you are trying to get the two pillars of free and high quality, then you can forget one to one, face to face guidance”.

“The people who are suggesting face to face have never given advice. You need to give it to people in a group situation. The obvious one is at work but also social interaction points, anywhere there is a degree of affinity between people where you can give good quality advice or guidance to a group.

“The person that can afford advice will pay for it, the person who can’t will need a mechanism which keeps him safe. This is the equivalent of clunk, clink. It won’t save them every time, but like a seat belt, it will reduce the level of casualties.

“It could be a football supporters club, it could be at church, as long people are of a similar age and financial position where they can all talk about it.”

Hargreaves Lansdown’s head of research Tom McPhail agrees with Reid on delivery needing to come from across the industry.

He says: “I don’t think you can use just one delivery channel. The Treasury and FCA are under enormous pressure to deliver this. It makes it more likely they will get the industry to help. So how do we harness the good, and minimise the bad stuff?”

He believes guidance can be delivered largely using online decision trees but perhaps with staff to walk people through the system. He says that EBCs and IFAs may even develop their own guidance systems and offer them widely, but that COBS 19.4, which governs insurers and the open market option will need to be rewritten.

Though he is not advocating this as a solution, rather to give an indication of costs, he says a central call centre dealing with 2,000 retirees a day could arguably be delivered with 400 staff on £25,000. He says that could be done for perhaps £10m.

But this would need robust hand off points, he says. People with debt might be sent to MAS, an potential annuitant should be sent for whole of market annuity help, while a decumulation solution should probably see someone sent to an adviser.

He says there is a risk that instead of rolling people into an annuity providers simply roll someone into drawdown and believes the FCA needs to look at the issues.
He suspects that given both investment and decumulation risk, running out of money, providers may want to look at providing advice in this regard.

Finally, and though not an official HL view, he says you might make guidance mandatory even if this simply meant just having to click through some guidance decision tree, before it was possible to access the pension money.

Cheseldine adds: “We think long term, trustees and providers will continue to do most of what they do at the moment. Employees want to be informed. That will continue. There will be a guidance guarantee and the best bet is a voucher system. People have an average of 4.5 pots. They may want guidance at 65 and 70. You may get a voucher at one point perhaps funded by a levy on schemes through the Pension Regulator. Then MAS or TPAS give the guidance. So you get basic guidance ‘free’ plus what you get from your employer free and then pay for more on top.”

Beyond this it may require full advice. There are tax implications about withdrawals. In an extreme case, people might take out all their pension and pay higher rate tax for the first and only time, when a small change in their withdrawal strategy would prevent this.

In addition, he says it is very unlikely many schemes would get involved in offering post retirement drawdown as that will surely require individual advice.

So IFAs dealing with the broad market should therefore do very well, but where does an EBC fit into that, he asks?

For his firm, he says: “What we would do is refer people to whoever does the guidance guarantee, help bulk communications or in some circumstance help choose an IFA to do communications, but with individuals we would refer them to unbiased.  An employer perspective means they would want to minimise the risk while making sure employees can retire safely”.