Don’t just focus on the negatives of pension reform – but need FCA to reform advice
26 March 2015
New Pension rules offer opportunities for better financial engagement
FCA needs to authorise basic advice to help people make good decisions
Last week I participated in a really good breakfast discussion about the Pensions Revolution taking place in the UK, hosted by Investec Structured Products. Pensions experts Robert Cochrane of Scottish Widow, Tom McPhail of Hargreaves Lansdown and myself were joined by ten leading personal finance and retirement journalists to discuss the pension changes starting on 6th April. It was especially interesting to get the thoughts on the reforms from a wide variety of viewpoints..
I think just about everyone round the table believes these changes are a good thing. This was reassuring, particularly as so much comment has recently focussed on the negatives and risks of the reforms, rather than how they can help overcome the straitjacket of the past system. Understandable concerns were expressed about the speed with which these radical changes are being implemented, and it is clear there needs to be a much greater emphasis on financial education and information to help people make the most of the new opportunities – and avoid the risks.
These reforms will have a significant impact on the entire investment industry. Gary Dale, from Investec explained alternative investment approaches that could replace annuities and also emphasised the importance of engaging with investors at a young age- I couldn’t agree more. We need 20 year olds to have a grasp of investment opportunities and to be able to react with confidence. In the past, there has been too much emphasis on encouraging members not to bother to think about their pension investments at all, just leaving it to the industry to give them ‘one-size-fits-all’ default options. In future, as more investment options become available, the need to improve financial literacy also increases.
This new challenge for the pensions industry is to help people understand investment from the moment that they start saving for their pensions. Financial education could be embedded into auto-enrolment pensions, so that everyone starts to learn about pensions as soon as they begin contributing. But it is vital that this is done in an engaging way, clear English, no jargon and hopefully some gamification and mobile communications to make pensions more ‘fun ’and ensure the members can understand the basics of investing for the long term. .
Another important issue discussed round the table was that the FCA rules on financial advice have locked average savers out of independent advice. The Retail Distribution Review has polarised the advice market towards the wealthiest savers, who pay a fee for financial advice and the majority of the market are left paying commission (often without realising it) to buy products without any advice at all and often making inappropriate choices.
I have urgently called for the FCA to investigate the possibility of authorising a system of ‘simplified’ or ‘basic’ advice, that could be offered at reasonable cost, to help people make better decisions. Pension Wise Guidance will help, but will only set out people’s options and help them realise what questions they need to ask, it will not give them the answers they need. It also starts later than people ideally need.
Of course, many people will keep working longer in future, so planning their pensions and savings in combination with work income, will be important for the future. Starting early and ongoing checks along the way to update financial plans will be needed. The pension changes give much more flexibility for people to use their pension savings to fund later life in the way that suits them best.
I am sure there will be many more of these roundtable discussions in coming months and I hope this will be just the start of adjusting to the brave new world that is opening up.