Pension freedoms could become the next big mis-selling scandal MPs have warned – leaving investors facing losses similar to the sums involved with the mis-selling of structured products, or even the multi-billion pound payment protection insurance (PPI) disaster.
The Commons Work and Pensions Committee has published its report on the advice which is available to all retirees benefitting from the new pension freedoms. As of April this year, pension savers have no longer had to buy a compulsory annuity. But before they can access their cash, retired savers are advised to take advantage of free guidance on offer.
The Government tasked the advice industry with providing this free guidance to all retirees known as the ‘guidance guarantee’ following last year’s Budget when pension freedoms were announced. Almost immediately the pensions industry hit back saying the proposals did not allow providers enough time to set up the system and that any advice would be restricted and therefore flawed.
This tallies with the recent findings of the Commons Work and Pensions Committee, who raised concerns that: “Consumers struggle to distinguish between advice, in which a specific product may be recommended by a regulated adviser, and guidance, which will provide an explanation of types of product but not a specific recommendation. The Investment Association told us that, ‘for most individuals, the dividing line will be extremely unclear’.”
The report added that it also does not help that free services providing guidance, but technically not advice, on pensions are called The Pensions Advisory Service, Citizens Advice and the Money Advice Service.
“The 2014 Budget documents detailing the pension freedom policy referred to a “guidance guarantee”, but in his speech the Chancellor referred to a “right to advice”. It is understandable that consumers may be reluctant to pay for independent advice if they cannot distinguish it from free support, or think that their adviser will try to sell them a product,” it concluded.
Tom McPhail, Head of Retirement Policy for Hargreaves Lansdown said that the committee’s report highlighted some important issues – but urged caution in how the industry should rectify these problems.
“The Committee advocates the expansion of public guidance services to fill the gap between advice and guidance as they currently exist. There is no evidence to justify this creeping nationalisation of the UK’s financial services,” he said.
“Hargreaves recommends that before throwing more resources at the free guidance services, policymakers should explore the development of personalised guidance by the financial services industry. The development of minimum standards for non-advised product distribution presents a more realistic and cost-effective route to delivering good consumer outcomes.”
Pensioners at Risk of Scams Need Better Advice
As well as concerns about the quality and clarity of advice leading to poor investment decisions, the report said that the new freedoms meant an increased likelihood in scams and financial fraud.
“Readier access to pension pots combined with the difficulties consumers have in making decisions regarding retirement finances mean that the pension freedom reforms have increased the potential for scamming,” it reads.
Frank Field MP, Chair of the Committee, said that “good quality, co-ordinated and accessible guidance and advice will be the best tools to ensure people make the best, informed decisions about their retirement savings, and protect them from scammers”.
Clearer Language Needed
The Committee also called for a change in the inaccessible language currently used by the pensions and advice industry, recommending that “accessible language and transparency about risks and charges should be central to the simplification process”.
The report calls for the Financial Conduct Authority to issue new stronger rules for standardised language.
Richard Parkin, Head of Retirement at Fidelity said that the support the asset manager supported the Committee’s call for greater clarity in the use of guidance – but warned that helping pensioners make informed investment decisions must be the number one priority.
“A tendency to suggest the choices are simple and to accuse all the industry of “getting in the way of freedom” neither presents customers with a balanced view of the complexity of retirement nor gives them confidence that pension providers and others can help them make sensible choices,” he said.
