Advice tiers and advice tears

Here's a quick look at yesterday's Interim Report from the FSA on their Retail Distribution Review. I think FSA are still looking for consensus about an end-point for the market. They tried out one end-point last year, and everyone's told them all those advice tiers were too complicated. So now, they say, here's a simple one.

This is my very initial reaction. I like the amended definition of independent advice, which feels like a attractive and distinctive proposition. I also like the continued determination to drive up qualifications and professionalism. But I don't much like the ideas on the "sales" channel. Good quality advice is scarce enough in these volatile times without reducing it further by limiting tied and multi-tied advice to something without know-your-customer and suitability protection. The majority of the industry's business by value comes from IFAs, of course, but the majority of customers get their advice and products via non-independent channels. In fairness, FSA have clocked this and offer variants which are more evolutionary, and which envisage more options for customers. In a world where we don't know how many of today's advisers will meet the new independence test, the future needs to contain as many alternatives as possible. If all professionals are honest with customers about what they can and cannot do, you can have fewer tiers and fewer tears.

We need to work with FSA to steer this review to a sensible outcome. And we need to do it fast, because despite changing the debate, FSA haven't extended the timetable for the next paper beyond this October. There's also an unmistakable air of "if you don't get on with it, we'll step in". If you've got something to say on this new vision, you need to say it before you hit the beach in August.

Francis McGee
Head of Corporate Affairs

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Personal accounts – building a sustainable structure

On a scale of one to ten, how interesting do you find pensions charging structures? As high as that? Well, the Personal Accounts Delivery Authority’s (PADA) consultation on personal accounts charging structures, which closed on 22 April, is more interesting than you might think.

First, PADA agrees with the Department for Work and Pensions that there is no one structure which is ‘fair’ for all members. That includes the flat annual management charge which stakeholder imposed right across the market. This should give providers and advisers more confidence in returning to shapes which can make it viable for advisers to advise pensions customers and allow a reasonable chance for providers to break even.

Secondly, it’s interesting to note the three criteria against which PADA is considering alternative structures. Fair and good value retirement outcomes for members. Encouragement for members to participate. And financial sustainability over both the short and long term. It’s a hard juggling act to meet all these criteria with any single structure. And PADA happily admits trade-offs are inevitable.

On retirement outcomes, different structures deliver in varying degrees to different groups. Participation will be higher or lower depending on a whole range of factors (and the chosen charging structure is unlikely to be high up that list). But financial sustainability isn’t something you can meet by half measure. It’s an absolute requirement.

For that reason, AEGON is urging PADA to treat financial sustainability as its top priority – and surely this is also what potential members will want. If you were facing auto-enrolment into personal accounts in 2012, wouldn’t you want to be sure the scheme was financially secure and would be there when you retired?

There’s growing consensus that to achieve sustainability, you need a structure which combines a modest contribution charge with an annual fund related charge. Let’s hope PADA takes this on board when it makes its recommendations to the Minister. I for one will follow developments with interest.

Steven Cameron
Head of Business Regulation

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Happy in retirement?

It appears people are not necessarily feeling happy about retiring. The Department for Work and Pensions (DWP) has asked people how they felt waking up on the first day of retirement. Less than half said ‘happy’, less than a third said ‘relaxed’, and under a quarter said ‘free’.

This challenges the image we all hold dear of retirement being the time of carefree enjoyment, and instead shows it’s an area of life that is changing fast.

Retirement is a enormous chapter in anyone’s life. And people are obviously approaching it in different ways. Some are happy and confident about the next phase of their lives. Some are more apprehensive about giving up their working life, losing contact with friends, and missing the ‘office banter’. Some may want to find ways of entwining their work life and retirement, by working for longer and easing into the next phase.

The Government needs to keep up-to-date with how people feel about retirement and their experiences throughout the whole episode. The financial services industry has a challenge to try to make the retirement process as easy as possible. But the Government also has a role to play in reviewing the rules for pension decumulation products – annuities and unsecured pension - to make sure they can provide income retirement solutions that match people’s needs in retirement. Whatever form it takes.

That way maybe we can make the world a happier place.

Rachel Vahey
Head of Pensions Development

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Wrapping it up

Over the last few months, the FSA policy team has continued to beaver away on the future shape of the market. Later this month the FSA will issue its interim statement on the Retail Distribution Review (RDR), which is expected to be the impetus for much activity. But in many ways the FSA has already fired its starting pistol by issuing its feedback statement, ‘Platforms and more principles-based regulation’.

If you are using or are looking to use a wrap or platform then this feedback statement is compulsory reading.

In essence, the FSA is saying five things about platforms:

• they are online administration services and not financial planning – they are the tools and not the craftsman;
• there are benefits for both advisers and customers. But platforms shouldn’t be used if they merely add to complexity and costs without any real client benefit;
• they can create conflicts of interest which needs careful management;
• not all advisers have the necessary competence to provide the level of investment advice offered; and
• disclosure of costs and services must be clear and transparent.

In its feedback statement the FSA states how it expects the market to work in the future. The clear message for advisers is – treat customers fairly, make sure they are at the centre of your thinking and if you don’t (under the principle-based approach), expect the FSA to take action. This isn’t an idle threat, as we know the FSA is already scheduling themed visits to see how platforms are being used.

I think the FSA’s view is just the right blend of stick and carrot and if it keeps this up, the RDR feedback will be a pleasure to read. But that’s another story for a different day.

Peter Williams
Head of Industry Development

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Important note

This blog provides the views of our industry lobbying team. The views are the opinion of the person writing the entry of the blog and don't necessarily represent the views of AEGON in the UK. They are based on their interpretation of industry developments and their current understanding of UK proposed and actual legislation, and should not be interpreted as recommendations or advice.