Retirement guidance guarantee may cost industry £120 million
George Osborne's promise of free, face-to-face and impartial guidance for defined contribution (DC) retirees could cost the industry up to £120 million, according to analysis from PricewaterhouseCooper (PwC).
Around 400,000 people this year will need to decide what to do with their DC pension pots. But this could equate to a minimum requirement of 400,000 extra hours of guidance, with an additional 500 suitably qualified people needed to deliver it.
With 2014 Budget changes to the DC pension regime bringing more flexibility and choice for retirees, many will welcome the promise of free guidance. But where will this advice come from and who will cover the cost?
The government has yet to announce any detail on the scheme, but there has been much speculation as to who will bear the responsibility and costs of guidance.
"The free face-to-face guidance guarantee at retirement needs to be paid by someone, but questions remain over who will shoulder this substantial burden," says Philip Smith, director in PwC's defined contribution pension team.
"Insurance companies could be facing a double hit from the government's proposals as they shoulder the duty of delivering this guidance at the same time they are contemplating how to fill the likely contraction of their annuities business."
The government expects pension providers and trust schemes to give every DC customer a "guidance guarantee" at the point of retirement.
It has promised a development fund of up to £20 million to get the initiative up and running and for the development of guidance materials and training.
However, Tom McPhail, head of pensions research at Hargreaves Lansdown, suggests this will have to be rigorously regulated to ensure insurance companies don't end up pushing their in-house annuities to customers.
The government acknowledges 'in-house' guidance may not be perceived as genuinely impartial, and that there will be a need for third-party advice. However, third-party advisers may not find the prospect appealing, unless they are suitably reimbursed.
"We have calculated the cost of advice from the minute we receive an enquiry through to its conclusion or ongoing service, and the costs to us (including a small profit for the business) is between £1,600 and £2,600 depending upon the case complexity," says Lorreine Kennedy, head of Care Fee Planning at chartered financial planners Carematters.
She adds that Carematters already gives a certain amount of pro bono advice as it is, so doubts if many IFAs will have the capacity to take on more pro bono clients.
"The most likely outcome is that pension scheme members will ultimately end up paying for the free advice indirectly, as providers pass on some or all of the costs in member charges," says Smith.
This article was written for our sister website Money Observer
Defined contribution pension
Often referred to as a “money purchase” scheme, although offered by employers (who may pay a contribution) these pensions are more likely to be free-standing schemes that a person contributes to regardless of where they are employed. Here, the level of benefit is solely dependent on the accumulated value of the contributions and their performance as investments. Therefore, the scheme member is shouldering the risk of their pension, as the scheme will only pay a pension based on the contributions and investment performance. The final pension (minus an optional 25% that can be taken as tax-free cash) is then commonly used to purchase an annuity that would provide an income for life.