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Hi, I'm Ros Altmann. My blog covers finance, pension, economics, investment and retirement issues. I'm an independent expert, advising Government, pension providers and finance companies and also helping consumers. I'm the UK Government's Older Workers Champion.

Guidance Guarantee must be impartial – providers will not protect customer interest

9 June 2014

  • Providers cannot be trusted to offer the Government’s Guidance Guarantee
  •  Some may look after customers but too many do not - and they cannot be impartial
  •  As FCA continues its study of the Retirement Income Market customers need reassurance that past failings will not be sanctioned again

Providers do not know their customers:  Pension providers cannot be relied upon to offer the Government’s promised free, ‘impartial’ at retirement guidance service.  The Association of British Insurers has suggested that its members, the ones who presided over the annuities market and regularly sold unsuitable annuities to their long-standing customers without even bothering to ask any relevant questions, should be allowed to offer this impartial service.  Astonishingly, the ABI spokesperson said at a conference today “providers are in the best place to know the individual customer circumstances and be able to adapt their existing pre-retirement communications.”  If they really did know their customers’ circumstances, then many of the failings of the annuities market could have been avoided.

Past promises did not work for customers and cannot be relied on:  If the providers’ existing pre-retirement communications were up to the job, then far more people would have actually shopped around and found better annuity outcomes for themselves.  The fact is that the providers - not all, but too many - have failed to look after customers properly in the past.  Commendably, many providers have said they do not wish to deliver the guidance anyway.  They are no doubt aware that too many companies have put the interests of their business above those of their customers, which is of course understandable, but it is not acceptable when trying to reassure the public.  There is scant reason to sanction provider delivery of this new guidance. 

FCA Thematic Review uncovered poor provider practices:  An important reason for the reforms was that providers were not treating their customers fairly.  Having the results of the FCAs thematic review of the annuities market, which exposed practices that were clearly not in customers’ best interests, it is important that lessons are learned that self-regulation of at-retirement products is not sufficient to protect consumers.

Providers cannot be relied on to meet the Government’s requirements: The Consultation on the Guidance Guarantee says that the Government needs to ensure customers ‘can be confident in the impartiality of the guidance they receive’ and the aim is to focus on ‘helping consumers understand the choices open to them’ and ‘how to engage with products and providers confidently and knowledgably’.  On each of these criteria it is simply not credible that providers will all be impartial.  Yes, there may be some firms who will try to be truly impartial, but the FCA has seen with the annuity process how inconsistent standards are among providers.  All the pension companies signed up to a Code of Conduct and various ‘Raising Standards’ initiatives, yet annuity customers were not given clear information and providers had ‘retention teams’ to ensure customers were enticed into buying their own - often very poor value and unsuitable - products. 

FCA broadens scope of its ongoing retirement income market investigation:  The FCA has today announced that it will be broadening the scope of its study of the retirement income market, which is welcome, but it once again suggests the guidance guarantee should not be left to providers.  That does mean that all providers have to be excluded from offering guidance, even if some of them might truly believe they can perform the required guidance impartially, because the FCA simply cannot pick and choose which providers should be allowed to offer the guidance and which would not meet any required impartiality tests. 

Providers will not offer all the options so would be tempted to bias customers in some way:  In the new pensions world from April 2015, customers will have a wider array of options and not all providers will offer all the options.  Indeed some options could be offered by companies that have no existing pension customers.  Therefore, members of the public must be given properly unbiased information, that is standardised and ensures all the options and materials provided to them are presented in a clear and comprehensive manner.  It is inevitable that providers offering the guidance will be tempted to include extra materials extolling the virtues of their own products, perhaps de-emphasising the products they do not cover and if there is no other source of guidance, customers will be misled into buying poor products, which may be irreversible.

Figures of 400,000 needing guidance straight away is a significant over-estimate:  Many commentators are suggesting that the huge numbers of people who will need guidance will make it impossible for any third party source to have the capacity to deliver.  This seems somewhat unlikely, but is clearly an issue that must be considered.  Many people have more than one pension fund, so are likely to only take the guidance once.  Not everyone will actually want the face to face guidance - but it must be offered - and they may prefer on-line information, Skype calls, webinars or group meetings organised by their employer.  Many large companies already have retirement advisers working with them and if they are independent firms of advisers or educators, these can deliver the guidance guarantee to the required standards.  This should cover a significant part of the demand.  It will also be possible to gauge the level of interest with pilot studies and pension providers can include a questionnaire in their pre-retirement packs which asks people to register their interest in having a face to face session, or whether they would prefer other media.

Worries about those who do not get guidance:  Some are concerned that many of those reaching scheme pension age will choose not to have the guidance at all.  That need not necessarily be a significant cause for concern, since many of those who reach scheme pension age in future will not actually be retiring - and many may have other pensions as well - so they may simply delay taking the guidance.  Until now, customers did not realise they could decide not to annuitise because their pension providers either led them to believe they had to, or they were sent to an annuity broker who had a vested interest in selling them an annuity.  Others who wanted to just take their tax free cash but either had other pensions or were still working, were forced to annuitise but will now not need to do so.   If they are going to buy an annuity, their provider should be required to make sure they have been sent to an independent, impartial guidance service that can help them find the right type of annuity and how to shop around for good rates. This would help the open market option work in customers’ interests and offer them far better protection than relying on providers who may be biased towards annuitisation.

Default should be ‘do nothing’ option:  If people do not want to take the guidance, that could mean that they may not need to take any money out of their fund for the moment.  The fact that people reach pension age does not mean they need to get any guidance, since they may be continuing to work, may have already had advice or be covered by provision elsewhere.  If the default option moves to not buying any product until later in their retirement, that has many advantages.  Someone who takes tax free cash and then waits before making any further decisions until they have more time to consider things carefully when they are retired may well make better choices in the long-run than having to commit to a product at the same time as making the life-changing adjustments to retirement.

Whole new industry of financial guides could be established:  My overall conclusion is that the guidance guarantee can be delivered by impartial third party bodies that combine all different media channels, including face to face.  These would be funded by the providers, in a similar manner to the funding of the Regulator.  With common standards, organisations such as The Pensions Advisory Service and financial advice or education companies, should be able to deliver a good service.  Even if TPAS alone does not have the capacity to deliver at scale, this guidance could form the basis of a whole new industry, encouraged and overseen by the FCA and operating in the customer interest.

1 comment

1 Joss Harwood { 06.10.14 at 8:00 am }

Ros, a well thought out argument, and I agree that it was totally unreasonable for the government to pre-suppose that providers would be able (or suitable) to go beyond their core business model and deliver appropriate advice on such a scale. Getting a centralised proposition together would also be a significant step towards plugging the ‘advice gap’.

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