A clearer definition of advice and stronger warnings about scams were two of the points raised in the Work and Pensions Committee’s report on pension freedom this week, which has found support across the industry.
The report, published on Monday, made a number of recommendations around people’s access to advice, ranging from personalised Pension Wise sessions to a long-term research programme into the effects of the new pension freedoms, and criticised the “dearth of information” on the uptake of the flexibilities.
The committee is also asking the government and the Financial Conduct Authority to explain the difference between guidance and advice.
“The boundary between guidance and advice is a mystery to consumers and providers alike,” it said in the report.
Malcolm McLean, senior consultant at consultancy Barnett Waddingham, agreed. “At the moment I’m sure that 99 per cent of the public do not understand the difference. To them it’s all advice,” he said.
At the moment I’m sure that 99 per cent of the public do not understand the difference [between guidance and advice]. To them it’s all advice
Malcolm McLean, Barnett Waddingham
“I’m pretty certain that many of the conversations with Pension Wise end up with them saying something like, ‘What do you think I should do?’ and the answer would be, ‘I can’t tell you that’.”
Pension Wise is not enough
Chris Noon, partner at consultancy Hymans Robertson, said the current FCA framework outlining what constitutes financial advice – anything that is at all personalised – means it is impossible to operate effectively.
He said he agreed with the report that Pension Wise has to “step up” in the guidance space.
But to bridge the advice gap, the government should provide a ‘safe harbour’ for employers, who many employees look to for help.
“Right now they feel hamstrung because they are worried that anything they do is advice,” he said.
Automated advice would also need to be enabled quickly, according to Noon: “For 90 per cent or more, the advice they need is simple; they just want information. A couple of questions, a bit of data and you could get a lot of those people into the right place quickly.”
The current financial advice market is shrinking and moving up the value chain and therefore not fit to serve most people with defined contribution pensions.
Noon added: “It wants to support people with £250k-plus of disposable assets. It doesn’t have an affordable model for people with £10k-£20k.”
He added that because lower net worth people live in an advice “vacuum”, they are vulnerable to scammers, and that protections need to be put in place, something the report also highlights.
Should employers pay?
Matthew Brown, partner at financial advisers Thomas Miller Investment, said that introducing robo-advice could be positive but would take time.
“We don’t want to see a whole generation of people retire before technology catches up,” he said.
Employers are an important intermediary, but Brown goes one step further by saying they should pay for advice.
“One thing we’re suggesting is to encourage employers to fund advice for employees in the same way that employers put thousands of pounds into employees’ pensions.”
Andy Wright, lawyer at law firm Ashurst, said the pension fund reforms have some way to go.
“The report highlights that the pension freedom reforms… have to overcome considerable teething problems before functioning properly,” he said.
