Expert: Andrew Tully, Technical Director and Paul Speight, Head of Key Account Development, Canada Life. Facilitator: Richard Parkin, Founder, Richard Parkin Consulting
- Pension freedom has had several unintended if not unexpected consequences. In addressing these, the FCA has introduced new regulations that will affect advisers both directly and indirectly
- While much of the focus on advice processes has been on defined benefit transfers there are some obvious parallels with other pension transfers and retirement income advice that could have a big effect on adviser businesses
- The Pensions Dashboard, while still some way from delivery, provides both an opportunity and a threat to advisers
- The growing prevalence of master trusts and D2C consolidators could put further pressure on advisers though may be necessary to fill the advice gap.
Unintended consequences of pensions freedom
Pension freedom has had several unintended if not unexpected consequences. In addressing these, the FCA has introduced new regulations that will affect advisers both directly and indirectly.
Pension freedom came as a surprise for many, if not most, in the advice industry. It was also unexpected by regulators who have been trying to develop rules to counter a range of poor outcomes stemming from the changes.
- Unsuitable, or at least questionable, defined benefit transfer advice
- A sharp increase in pension scams and the inappropriate use of high-risk investments
- Many consumers drawing down from pensions at what might be considered unsustainable levels
- An unintended shift into cash at the point of taking benefits.
Even where regulatory remedies are aimed at non-advised clients, there could be an impact for advisers. A good example is investment pathways which, while aimed at non-advised customers, also must be considered when advising clients on taking benefits. Moreover, advised drawdown clients who go direct to a provider to make an additional withdrawal without advice will be put through an investment pathway journey which could disrupt the advice already given or even result in a lost client.
Not only has pension freedom had unintended consequences, so may some of the remedies that address them.
Reading across from defined benefit transfers
While much of the focus on advice processes has been on defined benefit transfers there are some obvious parallels with other pension transfers and retirement income advice that could have a big effect on adviser businesses.
The FCA’s review of retirement income advice, commonly referred to as Suitability 2, has been shelved due to lack of regulatory bandwidth. However, it hasn’t gone away altogether, and advisers will want to consider how some of the principles that came out of the review of defined benefit transfers might be applied more broadly.
One area is in the specificity of suitability reports. In its recent DB transfer guidance FG21/3, the FCA sets out some helpful examples of what good and bad practice look like with regards to considering suitability. It seems inevitable that these principles carry across into retirement income advice more generally.
Similarly, the requirement for advisers to consider an individual’s workplace pension scheme as the natural destination for a defined benefit transfer should logically extend to other transfers. At best this may introduce unwanted delays into the transfer process. At worse it may severely curtail the flexibility advisers have to use their preferred product choices and/or expose them to additional regulatory scrutiny. With workplace pension providers gradually improving their retirement offerings, demonstrating that an individual pension arrangement is preferable may become more challenging.
Pensions dashboards – friend or foe?
The Pensions Dashboard, while still some way from delivery, provides both an opportunity and a threat to advisers.
Pension dashboards were first mooted by George Osborne in what was to be his last budget in 2016 with the promise that the first would be implemented by 2019. Five years on the implementation date has gone out to 2023 and even that is subject to significant delivery risk. But while they may be some way off, dashboards present both an opportunity and a threat to advisers.
The opportunity is that they should make it much easier to identify an individual’s total pension wealth, or at least where that wealth is held. This could significantly reduce adviser administration costs and make consolidation of client assets ahead of retirement easier.
The threat is that commercial dashboard providers will inevitably be trying to drive consolidation to their own products. While much of this activity will be for small pots that most advisers will be disinterested in, it could also be attractive for clients with more invested.
Masters of the universe?
The growing prevalence of master trusts and D2C consolidators could put further pressure on advisers though may be necessary to fill the advice gap.
While master trusts have been around a long time (some readers may fondly remember Stanplan A) they have only really come into prominence with the introduction of automatic enrolment. Originally, they were focused on smaller employers but have quickly become the preferred DC structure for even very large employers. Standalone DC schemes are quickly realising they can reduce costs and governance overheads by shifting to these centralised schemes.
With huge economies of scale and challenging economics, master trusts are inevitably looking to retain member assets through and into retirement. Proposition development is still relatively embryonic but with an increasing number of providers offering advice alongside their products we could see a quick shift towards master trusts as significant players in the retirement market.
While D2C consolidators such as Pensions Bee may not be able to compete with master trusts on price, they have certainly captured consumer attention. While perhaps not in competition for the same clients as many advisers, there is a risk that these consolidators start to eat into legacy advised assets.
Retirement advice has changed significantly over recent years and is set to continue to do so. Advisers face increased regulatory scrutiny and challenge, while master providers and DC consolidators are gaining momentum and could start to compete with advisers, at least for some lower value customers. Addressing both these challenges will need advisers to deliver and demonstrate the importance of good retirement planning and move beyond the current focus on cost as the main determinant of value.