JLT's Margaret Snowdon explains how schemes can look beyond the free guidance and draw upon other sources of information to help employees work through financial questions about retirement.

In recognition of this risk, chancellor George Osborne also introduced the concept of the guidance guarantee, whereby free and impartial advice would be available to everyone at the point of retirement.

The cheering was loud and hearty, and work began to flesh out what it would mean in practice and how it could be delivered in slightly more than 12 months. 

Key points

  • Guidance is needed at many points in an individual’s savings journey, not just when they reach the point of taking their benefits

  • The guarantee is a good thing, but it creates a 'guidance gap' and potentially a quality gap

  • The gap will be filled by enlightened employers who will increasingly provide high-quality guidance and advice to their employees

Closer inspection revealed the advice will in fact be guidance, paid for by the financial services industry, and will only be available to defined contribution scheme members at the point of retirement. So very early on it was apparent there would be a huge guidance gap that would need to be filled. 

The decision by HM Treasury to use only non-commercial delivery partners immediately restricted the scope of the guidance to the reach and capacity of those organisations. 

Over the few months since the announcement, the delivery partners, Treasury and the industry have worked hard to devise and build a workable solution – Pension Wise – but the reality is it will be limited and only available to up to 300,000 DC retirees a year. 

A great start, but more is needed.

What can be done about the guidance gap? 

The guidance gap includes:

  • DC scheme members not yet at the point of retirement, who need help with savings plans, contributions and investment choices;

  • defined benefit members who do not qualify for the free guidance service and need help with retirement planning or understanding scheme changes;

  • those who do not want the free guidance, but could benefit from greater understanding about the choices they face;

  • those who try the guidance and remain confused.

The guidance era may be now, but enlightened employers have been the unsung heroes providing both guidance and financial advice to employees for several decades.   

For example, pre-retirement seminars and counselling have been given to thousands of people and helped them think through financial and social questions about retirement. 

Online, telephone and face-to-face guidance has been offered to many scheme members to help them understand their options and make sound decisions.   

All of this has been paid for by employers who have seen the need for, and the benefit of, a pensions-savvy workforce.   

Administrators help countless numbers of scheme members every day with their options and concerns. 

No one calls this guidance, but it is an unregulated conversation conducted by people who know what they are talking about. 

However, concerns about inadvertently giving regulated financial advice and pressures on fees have reduced these conversations in recent years.   

With the introduction of centrally provided guidance there was a risk that employers would back off and rely on the guidance guarantee, but the good news is employers are even keener to help employees plan for retirement and make robust decisions. 

The quality gap

The second gap is one of quality. Regulated advice must be provided by suitably qualified individuals. However, the guidance guarantee may be fulfilled by people with minimal training and understanding of pensions. 

The quality of guiders will impact the quality of guidance, and so lowering the standards is shortsighted – albeit cheaper and faster to implement.

While the guidance guarantee is an important safety net it leaves some significant gaps, which employers will be prepared to fill.

Margaret Snowdon is director at JLT Employee Benefits

Topics