There are concerns over whether the UK has enough spare power capacity over the coming years. So to ensure the lights stay on the government is offering electricity producers a “capacity payment”, which is a payment simply for having power available at peak demand times. An auction will be held to see which producers gets the capacity payment.
There are also concerns over whether the UK has enough financial expertise to meet the demands of a maturing nation with pension freedoms they have never before enjoyed. I haven’t heard of any adviser getting paid just to be able to adviser or any workplace pension provider being paid to offer workplace pensions.
(Sorry… let me rephrase that- I have only heard of one pension provider being paid just to be there and funnily enough it is a Government quango called NEST.)
Why is financial services different from UK power?
The answer is that the product we produce from burning coal, smashing atoms or driving water through turbines is clearly definable- it is called electricity and it is easily measurable in terms of quantity. The quality issues surround the bi- products of production, pollution, radioactive waste or the environmental scars of windfarms and dams.
Our concern for financial services is that the outcomes of the decisions we take today, may not be known for decades. We are not good at predicting these outcomes (see yesterday’s blog) and so we set up regulatory systems that attempt to control the sell side through codes of practice that try to “treat the customer fairly”. We prescribe what the financial products we buy look like and are charged at through price caps and statutory governance (IGCs). In short, instead of paying people to be good , we force people to pay not to be bad.
In return for regulatory compliance, people , firms and multi-national insurance providers are free to practice in the UK, playing as they like in our markets. Some insurers choose to cherry pick, some prefer to bottom feed. Some advisers advise the wealthy, some engage with auto-enrolment.
At first sight, capacity for power and financial services seem very different things.
Taken over the long-term, the two industries are not that different. The product experiences surges in demand and long periods where “not much happens”. The quality of the service must be maintained throughout. There is a public service obligation on our power providers and on our financial services companies. There is a cost to maintaining capacity in Financial Services as there is in electricity supply.
Where are the surges for financial services?
We are about to see two surges, the next twelve months will see a surge in interest in the spending of pension pots with demand for advice and guidance on drawdown- annuities and the cashing out of pension plans set to rocket.
2016 and 2017 (and to a lesser extent next year) will see an explosion in demand for workplace pensions – in particular for their installation into over 1m small employer’s workplace infrastructure.
How does a Government ensure capacity?
So far the answer has been to establish NEST, a £400m investment in pensions infrastructure which is the safety net if all else fails. The difficulty with NEST is that the larger the investment, the greater the temptation for Government to use it as a means of closet nationalisation.
If NEST becomes a cuckoo that eats the eggs of other wildfowl then we will have a very plain pensions ecosystem. It is therefore incumbent on Government to encourage diversity and ensure that smaller providers can compete against the cuckoo that is NEST.
As regards the Guidance Guarantee, this too will be delivered by Government funded quangos, TPAS and the Citizens Advice Bureau (with help from a third- the Money Advice Service).
As the heads of these quangos are keen to point out, a 30 minute guidance session is not going to solve people’s financial planning for 30 years. The Guidance can at best point them in the right direction, towards products and services that are useful and broadly suitable.
Neither NEST or the Guidance Guarantee can be exclusive, there must be private capacity behind the Government behemoth, to pick up the demand and ensure a properly function system of choice through competition.
So far I have seen very little recognition from Government of the issues for smaller providers and advisers in planning for the needs of the many. The RDR has meant it financially impossible for most advisers to make money out of the mass market and the cost of auto-enrolment is making it hard for small advisers to concentrate on advising on workplace pensions.
What is the answer?
Diversity among workplace pensions must be marketed to allow smaller firms to compete with NEST. This means spending real money and not messing around with a skewed directory on the Pension Regulator’s website
There is a capacity issue looming in 2015 and looming larger in the following years. I do not have an answer to that issue but I am interested in the example of Power. I would like to see Government encouraging smaller providers to stay as workplace pensions by helping those who commit to the new quality standards, compete against NEST.
This will mean keeping NEST the “insurer of last resort” and not promoting it beyond all others, it will mean promoting diversity in the workplace which may mean giving a leg up to the smaller firms.
VAT on pension advice must be scrapped
Similarly , it is time for Government to seriously re-consider how advice is paid for. I am not talking about returning to commission but of encouraging advisers who are prepared to sell advice as a free-standing product, not to be penalised by an unfair system of VAT payments.
Charging VAT on advice to private individuals, where the advice is not associated with an insurance product makes advice 20% more expensive. Small wonder that many advisers are integrating their advice into products where this cost is hidden or not levied (the product being insurance based.
This goes to for advice on workplace pensions. Smaller and micro employers who do not collect VAT, should not be hit for VAT on the cost of choosing and implementing a workplace pension,
We have called for this for two years and as the auto-enrolment and Guidance capacity crunch looms we call for it again. Press the link above to see the full argument.
Today I will be at the Treasury talking with them about capacity among advisers to deliver. You can be sure I will be making just these points.