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Time for action on the advice gap

Consistency and collaboration between public bodies is a frequent industry ask. So we were excited by the House of Commons Work & Pensions Committee’s clear recommendations for Government and regulators to act jointly on the critical issue of helping people make decisions about accessing their pensions. The Government response, out last week, indicated routes to increasing the support customers receive, but did not quite live up to the committee’s call. The upcoming Queen’s Speech is another milestone where we could hear more about the scope for policy change in this area.

  • Over half – 52% – of all pension pots are accessed without either impartial guidance from Pension Wise or regulated financial advice1, even though these are some of the most complex financial decisions people make in their lifetime.
  • Only 20% of 50-64-year-olds have spoken to a financial adviser when accessing their pension.Half of UK adults with £10,000 or more of investible assets did not receive any formal support to help them make investment decisions over the last 12 months, and only 8% of UK adults received financial advice.
  • There is a clear benefit from getting more support. People who use advice or guidance are more knowledgeable and more confident. There is a lack of awareness of the risks associated with investing, with 45% of non-advised investors failing to recognise that ‘losing some money’ was a risk of investing.

The regulatory framework is one of the barriers to more people getting advice. The protections are there for a reason: to prevent sales of unsuitable products to customers. But there is plenty of evidence that it also inhibits firms from helping customers to good outcomes. Since this stems from the EU-level Markets in Financial Instruments Directive, and guidance from the European Securities and Markets Authority, it is within the Government’s gift to change. Potential interventions sit on a sliding scale between amending the guidance, to a new regulated activity for personalised guidance. There has been speculation that this may be included in the Queen’s Speech – there are wider reforms to MiFID in the pipeline, and this would give it the profile it deserves.

There are opportunities, and a strong case to intervene, to help customers get started invested; move between investments; and help them make decisions throughout life that are tailored to them.  Our focus here, however, is primarily on turning pension pots into a retirement income, where there is a huge need and a significant risk of harm, and hence the greatest necessity for joint work between FCA and DWP.

This is also the area where some encouraging statements emerged last week. We have been speaking to the FCA about this topic for some time, and it is welcome to hear it said publicly that they “want to understand firms’ concerns in more detail and discuss options for how they can provide more personalised guidance within the current regulatory framework”. And for more complex decisions, like combining the security of a guaranteed income with the flexibility of drawdown, the FCA concurs “it may be that many savers would be likely to need paid-for advice to choose a suitable mix of products at this stage, especially as each consumer’s circumstances and objectives will be different and subject to change”. The reality is that many customers need help to make these choices, but will not use the gold standard of regulated financial advice.

Beyond advice, the Government can introduce measures to make it easier to access guidance and to make choices easier, like investment pathways. The ABI’s evidence – the only market data we are aware of – indicates that investment pathways are working as intended. While still preliminary and subject to change, it has been fairly consistent throughout the first full year of the pathways. There is an almost even split between those who opt for pathways and those who remain in current investments in most quarters; and a similar number of customers choose either a pathway based on not touching their pension for five years, or one based on taking out all of their money within five years. This demonstrates that a single default would not work for those customers.

These pathways only apply to contract-based schemes, regulated by the FCA. Some of our members are already implementing pathways in occupational schemes, subject to DWP regulations. Our view, shared by the Work & Pensions Committee, is that DWP should implement the same policy so that customers have materially the same experience. No such promise was forthcoming in the Government’s response. DWP appears to be starting from scratch and it would be disappointing if they took a completely different approach. We know investment pathways aren’t perfect, but DWP and FCA should both look at the findings of the upcoming FCA review of them and move together if any changes are needed.

However, there is no reason why DWP should not implement the pathways and then go further – it would be welcome if they used this opportunity to increase the support given to scheme members. In the response out last week, DWP said “The government remains concerned that individuals may see their retirement outcomes negatively impacted if they choose to access their PCLS* early without taking informed decisions relating to the remainder of their pension pot

If this is a ‘remaining concern’, it is not one the Government has talked about much. So it could be a significant moment in the story of pension freedoms. It would be challenging to remove the freedoms which people now enjoy, but it could signal the start of a new approach to offering more support. A key gap in the post-pension freedoms policy landscape, not addressed by the FCA in its Retirement Outcomes Review, is in decisions about withdrawals – not least decisions about how and when to turn the remainder of a pot into a sustainable income. The ABI’s report on supporting customer withdrawal decisions set out ways that providers already help, ways they are inhibited and ways that regulators could help. This takes us back to improvements to advice and guidance.

There is an opportunity to set a new direction for advice and guidance, to provide people with more support with pension and investment decisions throughout life. The problems are clear and there is a will to address them. But to deliver on this requires a collaborative approach across the range of public bodies with a stake in it. The industry’s role is to provide continuous input, with ideas and evidence to enable public bodies to act, and to enable scrutiny if they don’t.

* Pension Commencement Lump Sum, the 25% tax-free cash people are entitled to take from their pension – and pretty much everyone does.


Last updated 06/05/2022