Providers should make people aware of Pension Wise and offer to book an appointment for them, the Financial Conduct Authority is proposing, in a bid to boost take-up of the free guidance service. But should policymakers instead focus on why there is a need for guidance in the first place?

 

Since the pension freedoms came into force six years ago, the FCA has been concerned that consumers make poor choices about their pension savings, with many entering drawdown unadvised or failing to compare different providers, while its research has shown that some access their pension only to move it to a low interest savings account.  

 

In response, it has over the years very gradually tightened the regulatory screw to mandate that firms have to help consumers navigate the at-retirement market. Since February this year, larger providers need to offer four decumulation ‘pathways’ to unadvised drawdown customers that are labelled in terms of the desired outcome, for example. 

 

To implement the provisions of the Financial Guidance and Claims Act 2018, the FCA is now proposing that when a consumer has decided how to access their pension savings, providers must, in a final behavioural ‘nudge’, refer them to Pension Wise guidance, explain the nature and purpose of it and offer to book an appointment.  

 

The provider will also have to confirm and record whether the consumer has declined the offer to receive the Pension Wise guidance, received Pension Wise guidance or had regulated advice. The Department for Work and Pensions is working on similar rules for trust-based schemes. 

 

These new rules would help to ensure that consumers get more information about the service, are further encouraged to use it and can have an appointment booked for them there and then, said Sheldon Mills, the FCA’s executive director, consumers and competition. 

 

“Pension Wise is a great service which helps people to understand their options when accessing their pension savings. We know that when people use Pension Wise, they are happy with the service and find it helpful. However, few people are choosing to attend a guidance appointment,” he said. 

 

 

The new ‘stronger nudge’ could increase take-up by more than three times said the FCA, referring to trials conducted by the Money and Pensions Service.  

 

With take-up among contract-based pension savers of just 3% under existing signposting requirements, this would still only equate to around 1 in 10 (11%) taking guidance. Despite the low take-up rate, MPs have voted down a proposal to make Pension Wise appointments mandatory, with some fearing it could become a tick-box exercise. 

 

“The FCA proposals are in my view very opportune and necessary in the best interest of consumer protection. I recognise the reluctance to go the whole hog and make reference to Pension Wise mandatory, but if these changes don't work, that should at least be left on the table and brought in at a later date if necessary,” said independent consultant Malcolm McLean. 

 

Too many consumers left to their own devices are getting it wrong, failing to make best use of their pension savings, paying more tax than they need to or worst of all, falling victim to scams, he added. 

 

The fact that so many ‘get it wrong’ points to more fundamental problems, some fear. Charlie Goodman, employee benefits director at Cervello Financial Planning, said the need for guidance is the result of people not receiving sufficient financial education. “Pension Wise was a reasonable short-term stop gap solution to a serious long-term problem inflated by pension freedoms,” he said, adding that the new proposals “will increase engagement, but it won’t solve the actual problem”. 

 

Goodman said we need to question why the need for a guidance service exists. “For me, it is symptomatic of a system that fails to educate people appropriately at school and in the workplace, fails to understand the psychology of money and why people make bad financial decisions, sticks workers now on an automatic path over a cliff, and fails to deliver what we need as a society to ensure older people don’t fall into poverty and living isn’t something we fear,” he argued. 

 

 

Ideally, individuals would seek professional financial advice on a decision which could impact their financial position throughout retirement, said Steven Cameron, pensions director at provider Aegon. 

 

“For those who are unwilling to do so, or feel the costs are prohibitive, guidance is a very valuable fallback and Pension Wise is free to those approaching retirement, as it’s funded by the industry,” he added, saying his firm supports the ‘stronger nudge’ measures. 

 

However, he was against mandating a guidance appointment for savers, claiming that it could stop people from using their money. “This needs to remain voluntary, as going further and making an appointment compulsory would effectively bar individuals from accessing their own pension funds,” he said. 

Provider Aviva highlighted the need for earlier intervention to be able to help consumers.

 

A spokersperson said the firm supports the 'stronger nudge', but that “for the ‘nudge’ to Pension Wise to be most effective, our experience suggests that it should occur much earlier in the customer journey, rather than at the point at which people are due to retire. This would ensure that people still have time to make a difference to their planning if, for example, they realise that they have not saved enough to achieve their retirement objectives." 

 

Charles Goodman

Malcolm McLean

Steven Cameron