Pensions, confusion and advice – the need to be radical (again!)
Back to 1995
In 1995, when I was at University, I had the honour (somewhat dubious) of completing a dissertation on the mis-selling of pensions (yes, I am one of those few individuals that actually decided to work in pensions as a career choice).
Over the August bank holiday whilst cleaning out my attic, I came across my masterpiece, and nostalgia got the better of me. I decided to have a look at what I’d written (bearing in mind that I was a fresh faced twenty-something with no real experience of pensions).
On reading the conclusions (some of which were quite radical), I was impressed that I had identified issues 20 years ago that are now being addressed and/or discussed (we all know the world of pensions moves slowly!)
So here are some of the recommendations included (verbatim) from my dissertation:
- The need for the public to be more informed about the different types of pension arrangements available, and the industry must stop using terms and language which almost any ‘outsider’ might find hard to understand.
- The need for somewhere where individuals can go to get absolute independent advice on pensions. Maybe having advice centres which are manned by qualified salaried persons, rather than commission-based IFA’s is the way forward.
- Other investment alternatives such as PEPs (the forerunner to ISAs) are good investment tools, but will not replace or cannot be realistically seen as an alternative to pensions.
Pension and advice today
All of these points resonate with my 2015 self, particularly as freedom and choice means individuals have to make more decisions than ever. The final point is, of course, very topical but for another day.
The need for clear, impartial advice is obvious, as is the need to use plain English. We have made great progress since I wrote my dissertation, but there is a still lot to do. The introduction of Pension Wise, clearer communications and improved workplace financial education are a great leap forward, but is it enough and what more can we do?
The Capita 2015 Employee Insight Report gives a useful snapshot of the UK psyche when it comes to taking advice:
- 5% of over 55 year olds do not believe they will need advice at retirement
- 2% say they would not pay for advice as they do not think they should have to pay for more advice
- 1% of over 55 year olds feel that their employer should provide advice when they approach retirement.
- 3% of employees aged 55 and above say they would pay up to £100 for advice; just 3.8% would be prepared to pay anymore than this.
The financial decisions that people make at or around retirement could affect them for 30 years which means it is crucial to get it right – now more so than ever. Clearly taking advice will help with this but the research shows a clear reluctance to do this.
We, as individuals, do not place ‘value’ on pension advice and hence do not invest time or money in it. Let’s compare this to some other activities such choosing a broadband provider, car insurance, or our next holiday. We will happily spend hours visiting websites to get the best deal and think nothing of it. Similarly when buying a house we will pay fees to surveyors and lawyers; i.e. in scenarios where there is an immediate and tangible benefit or sense of gratification.
Radical thinking required
If I was to re-write my dissertation today, I would recommend that we do something radical – we force individuals to take advice when they take benefits. If writing the cheque (or in the 21st century, transferring money via the smartphone) is the issue, then we need to negate the need to do this.
One way to do this is to use the concept of inertia, just like we are doing to enrol individuals into a pension scheme. Why not ring-fence a fixed amount or percentage of the accrued fund so that it can only be used to pay for advice and nothing else? The ring-fenced fund would only be able to be spent with accredited advisors and be paid directly from the pension scheme to the advisor, thus ensuring quality, value and removing the psychological barrier to taking advice.
I wonder what I will think when I look back at this article in 20 years time?
This article was supplied by Anish Rav, senior consultant, Capita.
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