Philosophy, Pubs and why pension freedom raises more questions than answers.

Across the land, in offices, conference centers and probably the odd pub  there is plenty of debate in the professional advice community on the impact of pension freedoms.

Although you might philosophically agree with pension freedoms (and for one I do) there’s no denying that currently there’s a gap between the philosophical “ideal world” and how the reforms will work in a reality which is as least as wide as the grand canyon.

I use the phrase ‘as least as wide’ completely intentionally as the reality of the challenges of this changing market for everyone involved is clear….

In truth, none of us really know how the demand for guidance, or advice, or increased information will change.

That’s why many of these debates are important to have but speculative in nature.

The reality is we’re not even close to seeing the real impact of pension freedoms yet.

However there’s no denying that all parties including TPAS, Citizens advice, charities like age UK and the advisory community all have a challenge on their hands.. We just don’t know the size, scope and scale of that challenge at this stage of the game.

This morning I was involved in one of these debates, together with Michelle Cracknell, Jane Vass from Age UK and Mick McAteer.

The particular slant of our debate was how pension holders with relatively smaller pots handle the reforms.

There’s no doubt that Pension Wise will play a huge part in helping smaller pots understand their options. I also believe that other groups with huge reach (including Age UK) will play a part in helping those affected understand what the reforms mean to them.

However where does that leave the role of advisers?

I can’t speak for you, but the current business model for my advisory practice doesn’t accommodate dealing with investors with small pots particular easily. There’s a commercial reality which means that to be profitable we need to be sensible in terms of the clients we can work with and those that can’t.

This is for a bunch of reasons including regulatory costs, the risks associated (which during our debate Mick made a particularly good case of highlighting many of them) as well as the human time it takes to help a client not only navigate the world of regulated products but also clarify and identify the connection they make between their money and their lives means that there are clear commercial restrictions on engaging with certain clients.

For the clients with smaller pots Pension Wise will help but what happens if at the end of the ‘guidance’ conversation when an individual with a smaller pot still wants advice? If it’s not commercially feasible for the adviser to take on the client, and even if they want advice, will they be able to get it?

Being an eternal optimist I hope we see innovations in the marketplace which will potentially provide solutions to this issue. However to be clear I believe these innovations need to be in the way we explain, communicate and guide people to make the right decisions as opposed to being in the area of new potentially complex financial ‘products’ which only long term erode the confidence of individuals who want to benefit from these reforms.

How we communicate and educate the changes for me remains the more immediate and pertinent issue.

Mick disagreed with this approach highlighting the point that the changes have the additional risk of seeing more complex financial products eroding the reputation of financial services longer term. He highlighted the risk that these changes increase distribution costs and therefore make the detrimental impact of these changes inevitable.

Whilst I’m prepared to accept this risk is a possibility surely it’s worth taking a look at how to decrease inefficiencies, using scalable technology and ensuring that a service can be delivered to those who are likely to need it the most….those with smaller pension pots.

Not more complex financial products designed to take advantage of the changes but services designed to help people inform, educate and make better decisions.

Maybe a commercial ‘advice’ service for smaller pension pots won’t be needed as Pension Wise will fully fill the gap. Maybe Mick’s right and the risks of pension freedoms hugely outweigh the potential benefits.

Maybe we won’t see the expected demand but maybe we’ll see a surge of people rushing to take their cash out. Maybe innovation will occur in this market and maybe because of the perceived risks of innovation in this market we won’t see this at all.

However one things for sure….

At this stage of the pension reforms there’s a lot more questions than answers!

What do you think?


4 thoughts on “Philosophy, Pubs and why pension freedom raises more questions than answers.

  • A very good article. Here’s one question you raise, and I’ve mulled over recently. How often, in financial services, has improvements in technology resulted in benefit to the end customer. Doesn’t it just result in more money for ‘the industry’ be it mañana turner or adviser. When did an adviser last say “this technology has made my job far easier and more efficient, I’ll drop my charges for advice”?

    I appreciate you’ve changed your charging model which might do just that, mind.

  • Thanks Phil.

    You raise an interesting and pertinent question…..who does innovation actually benefit?

    I reckon in many instances you’re right. Innovation benefits the adviser without many of the cost savings passed on the individual….however with my adviser (and business owner) hat on I’d say that part of my job is to find efficiencies within my business and make a profit whilst ensuring the client still gets great value.

    It may be simplistic but I reckon part of the answer is in building tools which are direct to consumer, instead of direct to adviser then to consumer, to fill the market not serviced by the advisory community (which in reality is most people and includes most of those with small pension pots)

    Direct to consumer tool (like nutmeg) are still in their relative infancy but don’t currently solve the problem of how to guide an individual through the complexities of any of the rules in depth or square the circle of helping people plan.

    Learnvest in the US comes closer (and is a model I’m a fan of) and SaidSo in the UK is taking an interesting approach.

    However this challenge is a massively tough one with a bunch of risks! In particular a lack of clarity on whether there’s any demand in the market, how you’d ever take all of the constituent factors into account and how you’d ever start marketing and distributing said product.

    Again… comment has raised more questions than answers in my own mind! But interesting to follow the thought process all the same! 🙂

  • Hi Chris
    An interesting read.
    I dont think that innovation is the answer though. If anything, the opposite is probably the solution.
    The reason that decisions about pension benefits are so complex, is because there are too many options. There are too many complicated, and interlinked decisions for people to be able to make the right choice without advice.
    The obvious solution is to remove choice. It is possible that the new pension freedoms will make this so evident that some action will finally be taken.
    I would think that the government could easily remove choice by removing the following options:
    1. Tax free cash
    2. Annuity purchase. Every one could be left with the choice of drawdown only. No UPFLS needed due to removal of tax free cash.
    3. Flexibility of retirement date. Everyone has to draw on their pension at their state retirement age.
    With pensions simplified in this way, people might be able to make choices without advice, although I think that it may be necessary to force providers to offer these options (unlike the new rules, which allow them to opt out).
    The alternative is for the government to subsidise advice – after all, successive governments have made pensions this complicated, so they need to take some responsibility.
    I suppose the other alternative is for the government etc to find somebody to blame. Top of the list of candidates at the moment are CAB, TPAS and MAS, followed by the industry and advisers.

    • Hi Phil,

      We agree on the fact that increased complexity and interlinked decisions make advice more vital than ever. I’m also sure it’ll lead to an increased demand for advice.

      However as more baby boomers retire over the next few years the reality of the marketplace is that there’s a risk that pension reform will mean demand will greatly outweigh supply at least using a conventional advice model.

      When I talk about Innovation I’m talking about a scalable model capable of filling this gap. However here is where the challenge is….how do you deliver a scalable solution in a increasingly complicated marketplace?

      To be frank, I really don’t know the answer to this! However thinking about how this might be done interests me.

      An answer could be to make the solutions more simpler by considering the simplifications measures you mention however I suspect now the pensions freedom genie is now out of the bottle….anything which might start to restrict might be politically toxic!

      Thanks so much for your comment.


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