Coincidental to the FCA’s impending clampdown on “price-walking”, I’m presented with just the kind of problem that has beset pensions since we decided giving people a pot not a pension was a good thing (let’s say 1987).
A very good summary @JosephineCumbo. Even today – years after the annuity market failure – there are still some commercial organisations that have not put broking solutions in place at the heart of their operations to help their customers shop around to achieve fair value.
— Stephen Lowe (@slowe1968) December 29, 2021
I am sure that neither Jo or Steve will mind me disagreeing with them, they are stalwart champions of consumer value, but in this they are wrong.
In an article in Corporate Adviser, which I assume is written by Jo (though it’s credited to the in-house team), Pension Wise is warned that it would compromise its value if it were to introduce commercial providers into its guidance process. It’s value is in its impartiality..
This means Pension Wise guiders are able to say things to clients that commercial providers would understandably be uncomfortable doing, such as exhorting the benefits of shopping around, and considering how charges can erode retirement returns.
But where does this lead us? It leads us down a rabbit hole
Over the past ten years, money from DC workplace pensions has been invested largely in passively managed equity and bond funds , resulting in nearly a trillion pounds inflating the cash reserves of large cap stocks. Meanwhile , opportunities to invest in young capital hungry companies, have been the preserve of the private markets. The cost of capital for small companies is very high, private markets make it so. Paradoxically, sites that promote purchasing long term investments purely on price (as this MoneyHelper service does).
It is conventional wisdom that the best protection for vulnerable consumers is transparency of charges. I think cost and charge transparency is very important, but it is not as important as the provision of value for money which comes from good governance.
The best measure of value for money is the outcome of the saving, not the cost of saving. The best way to measure outcomes is to look at net performance as it impacts individual savers – expressed as internal rates of return. This is the way that those who manage our savings can judge their success and it’s the way they can be held account by fiduciaries and regulators.
Pension Wise has no business guiding people to one provider over another. It’s job is to make people aware of the choices they have following the easing of tax regulations in 2015 that resulted in pension freedoms.
I would be interested to know whether Pension Wise are recommending the use of the MoneyHelper retirement income price comparison site. It should not, the site is clearly advising people to choose the cheapest product.
Can Pension Wise fulfil its role on its own?
We have between 700,000 and 900,000 each year getting to a point where they might need help with what to do with their pension pot(s). Pension Wise is getting to a small percentage of them- too small by common consent.
But Tom McPhail’s report earlier in the year suggests that Pension Wise – though an acknowledged success – is expensive and inefficient.
The review remarks that much of what Pension Wise does – in providing guidance to older savers considering drawing on their pensions – is duplicated by providers in their pre-retirement communications with customers.
On the back of which, Tom suggests that pension providers be empowered to be a part of the delivery of Pension Wise guidance.
In my view Tom’s suggestion is helpful. The decisions people need to take at the point they come to take decisions on their pots are not tactical but strategic, they need to establish how they are to organise their retirement strategy, not who to hand the management of their retirement savings to.
So do I concede that handing the job of helping with people’s development of their strategy is compromised by getting the likes of Hargreaves Lansdowne (Tom’s old firm) involved – not so long as the provider remains unconflicted.
Is seal-clubbing still a worry?
In the past, insurers have been deemed guilty of “seal-clubbing” , a phrase coined by Steve Groves, then CEO of partnership to describe the practice of picking off vulnerable savers and fitting them up with rubbish annuities. The conflict of putting a seal-clubber in charge of guidance is obvious.
Most of the time a pension provider is unconflicted in its guidance. Information on state benefits (including pension and universal credit), on defined benefit schemes and on the concerns most over 50s have with regards tax, inheritances and health, all can be delivered without conflict.
Where commercial providers become conflicted is when they are providing the investment pathways that people might follow with their retirement savings , especially where the provider is limited in its capacity to provide them. For instance Hargreaves Lansdown,do not provide annuities themselves, their core service is a self invested personal pension. But I remain sanguine.
Hargreaves Lansdown like all pension providers offering investment pathways, has external governance of its products and their presentation from an IGC (or is small, a GAA). It is the job of these governance organisations firstly to ensure that the pathways on offer are fit for purpose and secondly to make sure that they are properly presented to policyholders who might be considering them.
If Hargreaves Lansdown (for instance) were to provide biased guidance, their IGC should be picking them up. If they don’t , the FCA should and if no one does – I will!
On January 1st, the FCA will be introducing a new regime for general insurance price comparison sites. This recognises that for many people, it is more important that they get rewarded for being a loyal customer with prime value for money, than they be marched off to shop around. Many people do not want to go shopping for financial products and want to know they can buy with confidence from a trusted provider.
This being the case, I see the role of Pension Wise as being limited to those who have either no trust in their existing provider or who are natural shoppers.
It would seem that between 10 and 15% of us are natural shoppers. The rest of us may feel happy to get guidance from our provider and – given resource constraints – I think Tom’s plan sounds fine.
What is critical is that we really ensure that the investment pathways offered to people are fit for purpose and that they come in time to include a Pension Pathway – about which you will be hearing a great deal more from me!
Unfortunately Henry there is still (obviously) commercial conflict within today’s non-impartial guidance. It’s interesting nearly all life companies have installed broking solutions for their pension customers seeking a guaranteed income for life (I think price is highly relevant here) – but not all of them. So those customers without a broking solution are effectively left to fend for themselves. Now that is a commercial judgement -maybe a cultural one. But it’s an inverse nudge, a deliberate choice, friction in the journey. And there is no IGC overseeing that choice. That’s left to leadership – culture/commercials.
Also the investment pathways only deal with what’s inside
drawdown wrappers – they are a backstop at the end of the customer journey. So if you’ve passed go and made it to the backstop – all you will receive is a drawdown.
I think the first Pension Wise question – the one most of us would ask if we were running it – is how do you make it more scalable and efficient. Not how do you outsource it. Most providers can only dream of attaining those customer engagement / feedback results.
Pension Wise does lots of good. But it’s not reaching enough people who would benefit from that intervention. There is a trial on the table with the Minister that could transform usage amongst target groups. The Minister hasn’t yet bought into this – but he has no other big ideas on the table.
After 6 years of Pension Freedoms – the government’s risk mitigation solution – Pension Wise – is only being used in 14/100 pension pots. The government appear content to let the increased risks
(Investment/tax/scams/poor product selection) to persist, unmitigated for the majority of middle Britain.
What’s odd is that Pension Wise is not getting much organic growth in numbers. I’ve used it and it’s hard not to feel you’ve been well guided – you have been. The problem is in what happens next. People do need better tools (dashboard) and default pension solutions (not just investment pathways).