Policymakers are throwing the baby out with the bathwater when targeting advice costs in pensions says Lorica Employee Benefits head of auto-enrolment Claire Abrahams
Almost a year on from the beginning of auto-enrolment and there is one thing all our clients agree on – that the legislation was not written by someone who would have to physically go through the process. So much unnecessary complexity appears to exist and only the most well-planned strategies will be suitable.
As we waited, holding our breath for the OFT report, we were nervous that the same principles would apply. But while the findings were based on best intentions it is unfortunately likely that those determining the legislation will make decisions which affect the masses – while trying to correct the problems faced by only a few.
The sceptic in me is also wary of the political hype and the requirement for politicians to be seen to be doing high-impacting, positive things. In reality, when you scratch under the surface of what proposed changes will mean, the impacts will be far more widespread. Yes, it is true that there are schemes in existence with charges that are too high with unscrupulous advisers behind them. Yes, there are unfair practices in some schemes. Yes, there are members who get a raw deal. But it will be a very dark day if all schemes and all advisers are held accountable for these issues. We need to remember that any changes will impact on the industry as a whole – an industry already suffering under the vast number of recent changes such as RDR and auto-enrolment. The OFT report suggests that AMDs should be banned and takes no account of the ranges of discounts that apply or the resulting deferred member charges under specific arrangements. There are many cases where AMDs are a positive feature of the scheme set-up – and many cases where the membership, as a whole, benefit significantly from them.
I struggle to see why these are so different to defined benefit schemes levying different pension increases on deferred and active members. It’s also important to remember that the deferred members in the DC schemes that have AMDs can choose to continue to pay a small monthly contribution in order to avoid this increase in costs – which may encourage additional pension saving for those who need it.
Or alternatively the member can choose to transfer their funds to their new employer scheme where this won’t apply. But, like most occupational pension schemes, these types of charges allow employers to focus the benefits of being in the scheme on their current employees. The problem as with many of the issues with pensions in Britain is about education and effort. If the employees don’t know they have these options they won’t action them. Alternatively, those who are perfectly aware just cannot be bothered to take the effort to make important changes. These apathetic people don’t benefit best from removal of such charges – they would benefit best from individual advice and advisers who do the brunt of the hard work for them, because it is in their interests to do so. Unfortunately, such advisers are likely to be a practice of the past, forced to stop as a result of the same OFT and RDR reviews. Unfortunately, the Retail Distribution Review (RDR) and the anticipated outcome of the OFT report will be likely to put an end to the good practice of giving good and well-received advice. And at what cost? I can’t help but feel that those in power are missing the point here. With the vast majority of Britons already suspicious of pensions and refusing to save adequate levels – and no incentive for providers or advisers to help change their minds – how will these anticipated changes really help to put things right? Surely the focus should be on education, education and more education. Surely it should be about putting the right options in place to teach employees that it makes sense to save, that the levels they are currently saving are probably not adequate, that the retirement lifestyle they desire is achievable but only if they as individuals, and not their employers or advisers, take the right actions. In my opinion, while auto-enrolment is a step in the right direction, it is only that – one step on a steep stairway – and many Britons will need a helping hand to get to the top.