The best place to put guidance

Employers are struggling to understand what the pension revolution means for them, let alone where the guidance guarantee fits in. John Lappin investigates where it could all lead

Employers have a huge amount of change to digest about workplace pensions and retirement. Yet amid this blizzard of information, regulations and communication messages corporate advisers report only a limited awareness of the guidance guarantee and its relationship to the big retirement income changes amongst employers.

Not only is awareness low, so is the expectation of what the guidance guarantee will deliver. A recent survey from Mercer found 62 per cent of employers and trustees believe the guidance will not provide enough support for members of defined contribution schemes.

That survey, of over 300 employers and trustees, also found that only 38 per cent of employers plan to simply facilitate access to the free independent guidance. The remaining 62 per cent will offer additional support, although opinions vary on exactly how.

Mercer UK DC & savings product leader Roger Breeden argues that the guidance as envisaged will come too late for many employees.

He says: “Trustees and employers need to review their communications and support to ensure employees get a full picture of the options available to them and the consequences of these early decisions. Once the changes announced in the Budget are fully defined they also need to check that all communications material meet the new requirements.”

Strategies for informing employees and members about what support employers will provide, whether paid for or free, are getting increasingly complicated.

Buck Consultants at Xerox head of pensions policy Kevin LeGrand says: “The budget changes are a further step in the movement away from the old fixed norm. With the new flexibilities the old two-step approach – before and after a single fixed retirement date – disappears. This opens up many possibilities around blending work and retirement. To get the most from the new flexibilities, decisions will have to be made and reviewed throughout the member’s lifetime; investment decisions will in future have to reflect the whole period of membership until death.  How does that fit with the concept of a single guidance event “at the point of retirement?”

Marcus Hurd, principal at Buck adds: “By its nature, the free guidance provided to members at retirement will be of limited value. As such, many employers will wish to help scheme members by providing information and help whilst they navigate their way through the retirement decision process. The challenge for employers is to provide enough information that members can make sensible retirement decisions whilst avoiding straying into the realm of providing advice, which can only be provided by authorised individuals.”

But could employer information and the government backed guidance conflict?

JLT Employee Benefits director Mark Pemberthy points out that employers fall loosely into one of two camps – those who provide information and those who do not.

Guidance will benefit employees of the latter group, but it does present a challenge to employers and their advisers who already provide information and help.

“I don’t believe the advice will be conflicting, but with multiple delivery points, the biggest risk involves co-ordination. With schemes not being able to deliver the guidance guarantee, there may be confusion among employees getting support from the scheme and employer, while the mandatory guidance comes from somewhere else. How we get those two experiences to mesh together to be a good experience is something the industry is going to have to do a lot of work on”.

He says that by preventing much of the industry offering the guarantee, the Government is missing out on a lot of capable resource. But he understands the concerns about misselling and therefore the rationale for going down the MAS and TPAS route.

There are concerns however about the effectiveness of guidance at all. Jelf head of benefits strategy Steve Herbert says: “Will it deliver? I have to say my gut reaction is no. If it can’t take people to the point of product placement – which it can’t – then all it is going to do is add another layer to the process. If they come for proper advice, they will have to be asked for more information to give a compliant answer. It could be an extra job to do, but with no great increase in consumer understanding.”

Hargreaves Lansdown head of pensions research Tom McPhail sees lots of debate around about how schemes will work with the likes of TPAS and MAS.

He says: “There is talk of some form of template or standardised communications that could be issued. It might say what you have invested and some additional information you might need, and then you might go for guidance. The FCA is very concerned that people understand the tax implications. Collectively, we are still thinking about what the minimum information that people need to receive from schemes along with guidance, and indeed how people get good information even if they don’t go and get guidance.”

Aon Hewitt partner Sophia Singleton believes members will come back to schemes for information. She says: “The guidance guarantee is a moment in time. It is going to send members back to their scheme to make the decision. The scheme will have to pick it up at the point. With schemes that are very good at member support, those members should turn up for guidance and not learn anything from it. Where schemes are not so good, they will.”

But are employers generally aware? McPhail believes that in the main they are not. “Even employers that have been through AE haven’t got their heads around the fact they are going to have to reinvent elements of their proposition already, both in terms of pre-retirement communications and the retirement proposition and of course their default fund.”

DB to DC transfers

The government has decided that DB to DC transfers will be allowed, but only when people seek regulated advice. Some experts believe issues surrounding who pays for that advice will dampen transfer activity.

Independent pension consultant Rachel Vahey says: “In the majority of cases it won’t be in the client’s best interests to transfer. The Pension Regulator has said even if the transfer is incentivised it’s not necessarily in the member’s best interests to transfer. However, the adviser may still want to make a charge for reviewing the case and giving advice, regardless of the outcome.

“But then they are in the position of saying to the client, that’s a bill for £1,000 or whatever for the advice, but the advice is saying don’t transfer stay where you are. How comfortable are advisers going to be doing that? And what damage could that do the client relationship? Some clients will resent paying fees just to be told they cannot transfer. Advisers also need to make sure that the strategy they adopt means they have a profitable business, and that means charging the right level of fees to cover the work they are doing, on the assumption that most cases won’t end up transferring.”

Vahey believes that if a DB scheme member cannot get an adviser, then they are stuck. “The trustees need to see that advice has been sought and given before they can sanction a transfer.”

She also suggests that pension trustees could also find themselves in a difficult position. “A member may come up to them and say I want to transfer, the trustee says you need advice, the member spends £1,000, gets advice but the advice says don’t transfer. What does the trustee do then if the member is insistent? And will the member be able to come back to the trustee years later and say ‘you let me transfer but your duty is to act in my best interests so you shouldn’t have done so?’”

Indeed it seems schemes are already demonstrating a reluctance to allow moves.

McPhail says: “The question of existing customers is a challenging one. We have come across an example of someone we gave advice to saying don’t transfer. They said “I don’t care. I want to do it anyway”. They went back to their scheme, which refused to transfer.”

He suggests there are safe harbour issues for advisers here. “A calculation of adjustment might be 11 per cent. But the guy says but I’d really like to get my hands on the money, and I’m single, no children and not in great health. I don’t care about the death benefit, and don’t care about the critical yield, don’t care about the spouse’s pension. Will the adviser put it in their recommendation or say I can’t possibly recommend a transfer. Will schemes refuse to transfer or does that undermine member’s statutory right to a transfer value 12 months out?”

Syndaxi Financial Planning director Robert Reid says: “There may be legal cases pending against providers of schemes who have transferred outside to people who are not kosher. When they get done, I think you will see a lot of restrictions irrespective of how you move money about”.

In its snapshot survey, Mercer asked employees whether they expected many transfers from DB to DC schemes. It found 76 per cent expected less than 20 per cent to transfer out, with only 16 per cent expected more than 40 per cent to do so.

 “Our experience suggests that the actual number of transfers from DB to DC would be around 30 per cent, so not dissimilar to what our participants expect. Such transfers, especially in great numbers, could have an impact on asset liquidity, administration processes and the employer covenant, so regular monitoring and building it into risk management programmes is essential,” says Breeden.

Pensions Management Institute technical consultant Tim Middleton says: “The starting point is that for anybody who is transferring, it is probably not in their best interests. Advisers seem to be anxious about this. They think people will be insistent customers. So advisers are reluctant, yet I would imagine realistically, there isn’t going to be a huge rush of people.” 

Technical Connection pension consultant Paul Clark says though unfunded DB is not allowed to transfer, funded local authority scheme members may transfer as can private DB.

“I think the regulator wouldn’t see their position as having changed. It has always been that you can’t recommend for or against the transfer purely on the critical yield.  I don’t think the regulator feels a need to give any more guidance. They need to make sure the existing guidance is followed”.

How will the freedom and choice policy affect the Treasury’s tax take? 

The budget predicted rising tax revenues from the freedom and choice initiative in the early years as individuals draw more from their pension pots than they would have through annuities. But that analysis was light to say the least on the impact salary sacrifice could have on Treasury coffers.

Opinions are divided about whether some employees will seek to take advantage of ability to take £10,000 out of the pension – £40,000 in the first year – by sacrificing salary for pension, thus avoiding employer and employee NI and income tax on a quarter of the money.

Some experts believe this will remain a relatively rare tactic. Others say that HMRC will get very interested if it were to be offered on a larger scale to a workforce to benefit both employer and employees.

Independent pension consultant Rachel Vahey says: “Bonus sacrifice would probably be more appealing than salary sacrifice. But even then the employer has to make significant changes including sorting their workforce into those above 55 and those under 55, and those who have started to take benefits. If the member gets a bonus of more than £10,000, then presumably they will want to split the bonus so only £10,000 is a pension contribution or £10,000 less other contributions. I think it’s an interesting opportunity, and no doubt some will take advantage of it. But it does mean additional administration for the employer. They may not relish taking that on.”

Syndaxi Financial Planning director Robert Reid says: “Salary sacrifice is an intrinsic part of people getting relief at source. I think it is far more complicated than it looks. I don’t think you can easily fix it. It is an issue that the government has not thought about in enough detail.”

McPhail believes uptake may be relatively small in number, even though there is somewhere in the region of £24bn of tax relief up for grabs in the first year, and perhaps £10bn to £12bn a year thereafter, according to figures from Corporate Adviser. He says: “I think you might see some people using the system to maximise their tax benefits. Are we going to see people diverting salary through pensions. My instinct is no. It will be isolated and HMRC will be watching for it and can probably catch it under avoidance legislation.”

Technical Connection’s Clark points out that we only have draft legislation which could change in the finance bill. But he suspects that certain types of behaviour could be frowned upon.

He says: “I think a big national firm that comes along and puts forward a scheme whereby a firm’s employees aged over 55, do salary sacrifice, wash it through the pension scheme to save employee and employer NIC, I suspect they would clamp down on it. How – goodness alone knows.”

“If someone has got net monthly income of £4,000 and they need £3,000, you have always been able to sacrifice that extra £1,000. There is nothing wrong with that unless you crystallise straight away and then do it the next month. If you were to sacrifice it in your twilight working years living off the income you expect to have in retirement, that’s always been possible.

“I think the problem what the Revenue would say to a firm doing it on a massive scale would be avoiding NIC.

“But is it going to be cost effective? Who is going to pay for that advice, perhaps out of the NI saving, but a normal workforce on demographics how many are over 55 and can take the benefits?”