Gareth Morgan
Most advisor talk this week has been about the consumer duty and the impact of SJP’s fall from grace. In the midst of it , I received a message from my friend Gareth Morgan with a submission to Government and a brief note
I noticed that the ABI have said that they disagree with the FCA proposal to exclude pension decumulation from simplified advice because it’s too complicated.
I’ve sent in a paper objecting as well, as it would, in practice, exclude low income people from advice entirely about this and there are really important choices they need to consider.
This is a subject close to my hears and Gareth’s evidence needs reading by more than the FCA. You should be able to download this long paper from this link, but if you can’t, contact me on henry@agewage.com and I’ll send you the PDF.
Below I’m publishing the main submission with the appendices , this is in the interest of space, the appendices are of immense value to anyone interested in the interaction of pensions and benefits.
Evidence for the FCA review
Gareth Morgan, Ferret Information Systems
February 2024
Introduction
We are particularly concerned about a number of advice and information issues which seem to fall within the ambit of this review.
The bottom-line effect of choices around the usage of pension savings for those entitled to means tested benefits
The availability of informed advice about these choices
The affordability of informed advice about these choices
We are structuring our submission by commenting on both the content of the review, in reading order and following that by briefer responses to the questions in Annex two of the review.
We would be very happy to provide further detail on any of our comments, if that was required and would prove useful.
Gareth Morgan
February 2024
Comments on the content of the review
- The foreword to the review points out that
“ … a majority of people are not accessing traditional channels of support such as regulated financial advice to help them make financial decisions. This means that the provision of financial advice is often out of reach for all but the already wealthy. I want to change this and ensure that a much broader range of consumers are empowered to proactively manage their finances”.
- While recognising the focus of the FCA, and its regulatory activities, on financial services companies, it is disappointing that the review is not wider in its consideration of not just the type and boundaries of advice but also the breadth of other sources of advice, outside the regulated sectors, In more detail.
Overview (review paragraph references)
- 5.a “8% of adults reported taking financial advice over the previous year”
- The Financial Lives Survey quoted, more accurately, refers to regulated financial advice. There are many other sources of financial advice, from informal advice from friends, neighbours and colleagues to more formal, non-regulated, advice from the wide variety of money advice, debt advice and general advice services, as paragraph 1.6 points out. While not able, or wishing, to advise on financial products, the latter services, in particular, are very much more likely to be expert in the financial issues affecting struggling individuals and families. Financial advice is not just about investment.
- 12 The emphasis on a regulatory system controlling access to advice through ‘firms‘ risks excluding other, possibly more appropriate, sources of advice and information.
The advice gap
- 3 Once again, the 8% figure quoted, implies that only regulated advice is financial advice. Regulated financial advice is financially unattainable for the bulk of the population. This does not mean that they do not seek and receive advice on financial matters elsewhere. The availability and quality of such advice is a matter of great concern with already substantial reductions in the funding for the advice services providing such support, and even more severe cuts threatened.
- 4 It would have been helpful to have more detail about the relationship between the level of pension savings and the concerns about advice fees. It would be very difficult to justify the costs of regulated advice for somebody with £10,000 in DC savings. The level at which the cost of regulated advice may become worthwhile would be considerably higher than this.
- 7 We have no argument with any of the points made here. Ignorance and lack of awareness, in any area, can lead to poor decision-making and poor or sometimes catastrophic choices. To add a little to some of these comments we would point out:
- 7a Disengagement with their pensions is common but it is not directly linked, for many people, with the decision not to build a sufficiently large pension pot to provide an adequate income. The inability to afford to pay such contributions is key for many low-income people.
- 7c The above comment in para 9 applies here.
- 7e Anecdotally at least, it is believed that at least some high-risk choices in this area are made because of a recognition that existing resources will be insufficient, that there seems to be no affordable way of reaching sufficiency and so the ’gamble’ might just be worthwhile.
- 7f It is unfair to talk about the ‘risk’ of advice from unregulated sources without recognising that, as with regulated advice, there will be good and bad advice. Implying that there is a likelihood that any unregulated source will be offering poor or scamming advice is grossly unfair to the many good advisers in that sector
- 8 We would suggest that the difference between holistic advice and information and guidance is not as clear, defined or as characterised as this suggests. There is no reason that personalised advice and recommendations could not be given outside the regulated sector. The crucial difference is that this should not include product recommendations or comparisons. As appendix 1 shows the type of choices made, in decumulation, can have a very large effect on income in retirement. Being able to give personalised assessments of different choices that could be made provides a real basis for informed decision-making. This kind of service will make use of an understanding of “a consumer’s overall financial circumstances and objectives” not with the aim of determining product choice or investment strategies but with the aim of ensuring that they better decumulation choices can be made. Current limitations on generalist advice in this area does not seem to permit the level of personalised detail which makes such work truly useful.
- 9 There is no doubt that a relatively small investment could produce systems, (such as our pensionForward calculation system used to produce the examples in appendix 1 and described briefly in appendix 3), that would be appropriate for direct consumer use. Such a system would be even more valuable if it were linked to pension dashboards. The real difficulty in doing this is not technical but as this paragraph points out finding the channel to the numbers of consumers which would make it both worthwhile and commercially feasible.
- 10 As we have said, we do not believe that there is a genuine issue around this boundary, for firms or other advice sources, if it is recognised that the personalised service can be provided without infringing regulatory boundaries.
Initial proposals to close the advice gap
- 15b It is our strong opinion that there is a very big difference in the suggestion in proposal to that firms could “suggest products or courses of action”. We would separate these two activities for very good reasons. Courses of action can have very different consequences, as we point out in appendix 1, regardless of the amounts involved or the products chosen. It might be described as the course of action being a strategy and the products involved being a more tactical choice. Thinking of these as being ace single entity, particularly based on a target market, is mistaken. It is also important to consider strategy first and products later. That is why the considering the range of different income or capital usage is so important.
Targeted Support
- 9 As we suggested earier, advice and information need not be limited to a generic provision based upon a target group; it can be personalised to reflect the individual circumstances of the consumer. For lower earning and income people, where benefits may be a relevant factor, it is important to recognise that precise savings, income and expenditure figures may be needed, as cliff edges in entitlement are common and generic information cannot reflect the individual position. Benefit rules and interactions are complex and ensuring that general information is safe, for every case, may mean that its value is extremely limited.
- 12 We believe that firms who wish to provide a more personalised service, need not see this as an ‘either-or’ service. With appropriate tools it is possible to produce a rapid and efficient model of support for those where detailed regulated advice is inappropriate.
- 16.c.ii It is unfortunate that this scenario points towards a product choice rather than towards the type of decumulation which would be most appropriate for their circumstances. Again the target market approach will risk misunderstanding the real situation of the consumer through a lack of personal detail.
- 19 individual personal and financial circumstances mean that it is very difficult, where benefits are involved, to categorise groups of ‘people like you’. It is also unnecessary when appropriate tools make it simple and safe to be more precise.
- 25 A primarily digital approach fits well with advice tools which are able to provide the more personally detailed information necessary for properly informed choices.
Types of suggestions offered through targeted support
- 28a ‘People like you’ does not help in the frequent situations where people are no longer ‘like you’ in detail. Circumstances are increasingly likely to change as people age, with frailty and disability increasing as well as changes in financial circumstances. For those dependent on a mixture of state pensions, benefits and smaller personal pension savings, such changes n circumstance impact both the needs and the resources that they must consider. The effect of these changes will mean that people should consider their income needs and how best to reach that. This may t be simple. As appendix 1 shows, small changes in pension usage can mean large changes in income and it is vital that such personalised information is available.
- 28b We would, again, emphasise that, for many people, the choice of a product should come a long way second to the choice of an approach. Only once the best approach has been decided by the consumer, after receiving the information about consequences and implications, should the best product be determined. These two stages need not be carried by the same advice process or advisor.
- 30 The non-regulated money and general advice sectors provide invaluable services to the less well-off in society. They find this increasingly difficult with financial pressures increasing and well publicised cuts in support, particularly from local authorities usually their core funder. It is impractical to expect them to extend their services further in this area. We would suggest that a relatively small contribution from the financial services industry would enable them to take on a greater share of the support. Whether this could be achieved voluntarily, or whether it would require a small addition to levies, is not for us to suggest.
Simplified advice
- 14 “Alongside wealth accumulation products, some respondents to CP22/24 requested that we expand the scope of a simplified advice regime to include pensions decumulation products, such as annuities, uncrystallised funds pension lump sums (UFPLS), and flexi-access drawdown (FAD). However, we think that these are financial decisions which may typically be too complicated to incorporate into a simplified advice regime. Drawdown decisions, for instance, may have income tax and inheritance tax planning implications, or complicated interactions with means tested benefits. So we propose that all pension decumulation decisions are excluded from simplified advice.”
- The effect of this proposal could be devastating. What choices to make about pension decumulation, when means tested benefits are involved, is a decision which may have serious, often unexpected consequences. Appendix 1 illustrates this in some detail. What might seem to be a simple choice between drawdown and an annuity could see the same person losing all value from their savings or maintaining a more comfortable retirement. The choice between taking savings in a form treated as capital or in a form treated as income important and very commonly leads to a large difference in real income. The best choice for individuals and families depends upon accurate and personalised information.
- The interactions with benefits can be complex but, with appropriate tools, this complexity is no barrier to providing accurate information for consumers to base their choices on.
- Excluding consumers from receiving such advice may condemn them to receiving no appropriate advice at all. For almost all people dependant upon benefits, there is no realistic access to IFAs or other regulated advice. Even where accessible, the level of expertise about the interaction of benefits and pensions is likely to be low. Other sources of personalised information are also hard to find and even where benefits expertise is found, it is rare for there to be pensions impact knowledge in the same place.
- The complexity of the interaction can be overcome by the use of appropriate tools, as described in appendix 3, and such capabilities extend the current levels of advice from all sources. The tools are not limited in use to benefit cases as the tax/pensions assessments produced can be valuable in all cases for assessing bottom-line outcomes.
Training and competence
- 32 If our assertion, that simplified advice should include the interaction of pensions and benefits, is accepted then there will be a training need. There are existing face to face and online courses which cover this area. We have been delivering half-day online courses covering benefits and pensions on behalf of the Welsh Government, to frontline workers, as part of the Dangos project. These have accompanying information packs and eLearning modules. We are currently developing a recorded version of the content of these sessions.
Specific considerations for pension scheme trustees
- 4 Pension trustees who have, in many cases, a closer relationship with members and a broader view of their role in providing information and support, are ideally placed to offer the more personalised information and advice needed. This product agnostic advice can easily be divorced from any direct provision of income or capital to members.
Questions
Q1: In your view, do any of the proposals outlined in this paper adversely affect different groups of consumers and why?
Yes. In particular the proposal in 5.14 to exclude advice around pensions and benefits. Our response is in our paragraphs 25 onwards above.
Q3: Are there are any other proposals that we should consider to help close the advice gap and how can we support the provision of more guidance? Please outline your proposal in as much detail as possible.
Our views are broadly expressed in the comments above. The proposals are too focussed on ‘firms’ as the only appropriate source of advice.
Q6: Do you support the concept of targeted support and do you support developing a regulatory framework to deliver it? If not, why not? Are there any key features (in addition to those discussed below) that you believe targeted support should include?
Again we broadly expressed our views in commenting on a number of areas above. The proposal is limited in its ambition and fails to recognise the potential for other sources of reliable and accurate advice and information.
Q8: Do you think there should be restrictions on the types of firms allowed to provide targeted support, and why?
Limitations should be related to capability and competence. Restrictions should be related to these.
Q9: Do you agree that the scenarios outlined are appropriate for a new targeted support regime? Please suggest any other specific scenarios where targeted support might
Our interest is concentrated in the decumulation area. Again the scenarios could go deeper and would find that more useful information could easily and accurately meet more detailed needs.
Q12: Which of the 3 options for types of suggestions would be most impactful under targeted support, and why? Are there any other options we should consider?
Before considering product specific advice in decumulation, it should be considering broadly the options for usage of pension savings in a product agnostic manner.
Q23: Do you agree that pensions decumulation should be out of scope for simplified advice, and why?
No! Deliberately reducing the possibility of receiving advice in a crucial area for many people is entirely unjustifiable. Our comments on this are found in our paragraphs 26 onwards above. Te reiterate, the choice between taking savings in a form treated as capital or in a form treated as income important and very commonly leads to a large difference in real income. The best choice for individuals and families depends upon accurate and personalised information.
Limiting access to such advice and information would lead to poor decisions.
