Why we don’t need to fear a pension “advice gap”.

Last night it was the House of Lords, this morning it was a Parliamentary Select Committee.

Both were concerned that an “advice gap” has been created that will mean poor people do not get financial advice on retirement planning.

The argument goes that since advisers will from January 2013 have to declare what they are taking out of people’s pots as an advisory fee….

and as the Government is banning such deductions where only minimum contributions are being paid into an auto-enrolled pension….

advisers will not get involved in auto-enrolment and poor people will be poorer still.

BUT!

The argument fails at a number of levels.

The first is that whether they wanted to or not, there simply aren’t enough advisers to deliver advice to the 10m people who will be joining the pension saving system.  Look at these numbers

Number of firms Size When staging AE Staging budget £ (DWP est)
Large Firms 6,000 >250 End of 2013 4800
Medium Firms 27,000 50-249 April 2014 200
Small Firms 371,000 5-49 June 2015- April 2017 80
Micro Firms 800,000 1-5 June 2015- April 2017 70
All firms 1,204,000 100 (average)

Coverage of 1.2m employers is beyond the scope of the UK advisory industry. Most firms will e-procure their auto-enrolment provider at best with the help of their accountant. There was never any hope that the bulk of the 10m employees would have individual advice , RDR or no RDR.

The second is that there is a very real gap between what a financial adviser does – deliver holistic financial planning and what “ordinary Joes” need to take decisions on their pension. People need a BR19, the basics of investment and an understanding of options at retirement. What is needed is basic financial education which is not what most IFAs cuirrently do.

I turn now to the principal reason why some insurers have been so opposed to removing adviser charging  from workplace savings . The RDR and the DWP’s censure on adviser charging has thrown into confusion the distribution model under which the insurance companies have been working since the advent of personal pensions .

I should point out that  the ABI is not as one on this as evidenced by this hot in from Aviva’s CEO David Barral (@AvivaBarral)

To repeat, vast majority of ABI members do NOT believe consultancy charging should reduce auto enrol minimums.

The point’s well made. If an employer or employee choses to pay for an adviser to advise out of a voluntary contribution beyond the AE minimum – fine!

But the DWP will still need to see that the service delivered is benefiting the member’s pension pot. If the adviser charging is simply benefiting the adviser (eg its a distribution payment) then it may jeapordise the Qualifying status of the Plan.

And without a means to reward the adviser from within the fund, insurers have no control over adviser behaviour. The majority of advisers will of course chose to market their services to rich people who can pay their charges and need the holistic planning they provide. But this leaves a massive gap in the insurer’s distribution plans.

Who will market the Aegon or Scottish Widows or Scottish Life GPPs to the 800,000 micro-employers? On current form, no-one. These employers will head for NEST or so the insurers would have us believe.

So some insurers argue that the absence of advice will mean a collapse in choice and a concentration of investment into “supertrusts”.  Bang on queue  I note Scottish Life telling the Parliamentary Select Committee today that forcing scale into the DC pensions market could be ‘detrimental’ for members! (@JospehineCumbo ).

Now this view of market failure (which defies economic logic) assumes that without help from an adviser most employers will not be able to research the market.

But most employers who have employees eligible for auto-enrolment , consider the investment of a substantial amount of payroll in a workplace savings plan a big deal.I can say this because I set these plans up for a living in my twenties and thirties. I have also been one and many of my mates are of an age when they employ others.

Employers will want to chose from more than NEST. They will want to compare the market and if they have no adviser they will search for a means on the web.

And Britain being the advanced economy that we are, there will be a large number of websites prepared to offer online information , portals to providers, quote comparison services and even on-line project planning tools. These may be run by financial advisers or as easily by internet entrepreneurs who simply buy in information from the financial experts and get on with it.

I notice that the this very morning Richard Parkin of Fidelity was asked by the Parliamentary Select Committee whether comparison websites, like http://pensionssupermarket.com  were possible (thanks again @josphinecumbo). The ABI will of course tell you that the charging of pensions is still too complicated but don’t you believe it. When even MP’s have clocked it- be sure the B2B moneysupermarket.com is round the corner!

So here is what I expect to happen.

Those people who “know their stuff” eg the really good advisers who’ve stayed in the game and learned what makes a good workplace savings plan, will start talking to groups of the micro-employers to show them how to e-procure effectively.

They will also tell them how to talk to their staff so their staff can get information on their pension plan’s progress.

They will not talk to the staff directly. As we already finding out, everyday people, given a smartphone and a web link are capable of getting the key information provided it is properly presented. Ordinary Joes are now able to take decisions such as whether to opt-out of the plan, or salary sacrifice, or the default contribution structure or the default investment option, and do it on their own.

The over-riding message coming from the early staging mega-companies is that employees tend to avoid telephone calls and face to face meetings which complicate things.

So what is needed is that the small group of pension experts are on hand to deliver education about what employers should be telling their staff and no more. That in itself will be tough but it’s a job that needs to be done. Because it needs to be done, because SMEs value their staff and their staff’s pension plans, this work will be vlaued and rewarded.

The message to Government is “don’t panic” the market will reform and deliver support in the form of financial education when , where and how it’s needed.

Employers will provide access to the techy stuff employees need to get help (and a phone line for the few who want to talk to someone or even set up a face to face meeting).

Employees will self-serve what they need and if they can’t find what they need they will shout to their employer who will pass this on to the pension provider (usually as a complaint).

This is a radically different model to any distribution model we have seen before. But auto-enrolment is a radically different system of establishing funded pensions than anything we’ve seen before. The RDR has driven  a fundamental change in the way advisers go about their work.

So third, and most fundamental of all, there has been a shift in the way we as a nation access information and tool ourselves up to take decisions.

Taken together, these three changes mean that , in the nick of time, we may have the means not just to make auto-enrolment work, but make it work well.

About henry tapper

Founder of the Pension PlayPen, Director of First Actuarial, partner of Stella, father of Olly . I am the Pension Plowman
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