Pension reforms - advice or guidance?

Posted: 1st October 2015

In March 2014, George Osborne announced the most significant pension reforms in a century without prior industry consultation. He also stated that everyone with a defined contribution pension would get “free, impartial advice on how to get the most of their pension”.

July 2014 saw a further statement from Osborne; “I’m pleased to confirm that everyone with defined contribution pension savings reaching pension age will get free and impartial guidance on their range of available choices at retirement.”

You can be forgiven for any confusion over what this means – the semantics are extremely important here. As we know, ‘advice’ and ‘guidance’ are two very different things, and carry different implications.

If confusion abounds in the industry, what chance does the average retail consumer have in making sense of it all?

Enter the regulator

Following these announcements, and in response, we have seen much regulatory discussion on the matter of pension advice and guidance. The overarching message of this is that being passive with regards to advice is no longer an option. The Financial Services Consumer Panel, working on behalf of The Department of Work and Pensions, noted:

“There are indications that consumers who contact their providers are encouraged to use the firm’s ‘in-house’ guidance providers, who are obviously not independent and impartial. It is crucial that consumers can access independent guidance to ensure they can make an informed choice that is in their best interest.”

In line with this statement, if a level of risk is apparent, firms must now provide an appropriate warning. There are eleven specific warnings in total, and which one is issued depends on how the pension is being accessed. The policy statement confirms that the retirement risk warnings must be given regardless of whether other information provided by the firm constitutes advice or guidance.

Perhaps Osborne’s change in terminology between March and July last year is reflective of the realisation that if the mountain won’t come to Mohammad, then Mohammad must go to the mountain. In an industry that has been moving away from direct advice, might holding firms accountable for the guidance they provide be the answer?

Taking action

The cumulative effect of all this is that the game has changed. The option of transacting with retail customers without retaining some responsibility for the resulting consequences is no longer a possibility. Can you evidence that you have the best interests of your customers at the heart of your business?

As a result, we are seeing pension providers having to either re-engineer their existing non-advised processes or build new advised propositions. But how do firms best negotiate the potential pitfalls of activity in this area?

For those seeking to re-enter the advice market, it’s a good idea to reflect on, and be realistic about, the challenges your firm could face:

• Banks and providers have spent most of the last ten years moving away from direct advice models and have not always retained the knowledge, experience or corresponding controls that are required to oversee them
• Developments in behavioural insight suggest that we are experiencing an alarming reduction in engagement from retail consumers. Testament to this has been the introduction of auto-enrolment for pension accumulation
• The industry has not been properly consulted on – and has had limited time to prepare itself for – the new pension freedoms
• Negative (arguably ill-informed) press coverage concerning the perceived excessive cost of advice

The benefit of providing risk warnings to customers is that even if they have ‘insufficient’ access to advice, they will at least be alerted to the need to seek full advice when it becomes relevant. It’s clearly a good idea to be evidencing this sort of behaviour within your organisation, as the regulator seeks greater consumer engagement with the government’s Pension Wise tool. Showing you are recommending Pension Wise when risk is present will stand you in good stead.

Begin to consider the resources you may need (e.g. QCF Level 4) to implement the FCA’s rules. A blend of regulatory, process improvement and training & development expertise may be required when making changes to your advice processes and controls. You can leverage these three elements to help ensure that as well as meeting regulatory requirements, you also bring your own people on the journey in an operationally and commercially efficient way. Getting all your people on-side will limit your exposure to mis-selling risk.

Post-fulfilment customer outcomes testing that augments your first-line quality checking offers perhaps the most cost effective and meaningful form of business assurance. It will ensure that any new processes and controls are both operating as intended and delivering the desired customer outcomes. It’s worth noting that good customer outcomes are very different to high levels of customer satisfaction; the skill will be to ask questions about customer understanding rather than employing a one dimensional “are you happy?” approach. 

The insight customer outcome testing produces allows firms to take a proactive approach to recalibrating processes, ensuring there is no reoccurrence of the same issues in the future and minimising the potential impact on customers.