The role of Administration in Guidance

19 June 2014

Like many, I welcome the guidance guarantee at the point of retirement for members of defined contribution pension schemes set out in the Freedom and Choice in Pensions paper. 

In fact, I would like to see the guidance available to all members of occupational pension schemes whenever choices need to be made, for example retirement, joining or leaving a scheme or benefit changes, but we have to start somewhere. If we are serious about encouraging people to save for retirement and need them to make sensible choices, we must be prepared to help.

There is widespread concern that there may not be enough resources available to deliver guidance to the potential 400,000 DC retirees each year. However, guidance need not be the domain of regulated advisers. There is an unseen army of professionals who could provide high quality, trusted help to members: pension scheme administrators. Administrators talk to scheme members every day about benefits and options, but currently feel unable to “help” individuals with their choices for fear of inadvertently crossing a threshold into Regulated Advice. This is a barrier that gets in the way of service and common sense and sends members into the arms of well-meaning friends, or in some cases into the clutches of salesmen and scammers.

So how do you ensure the delivery of good quality guidance without the risk of falling foul of FCA regulations? How do you ensure that guidance is impartial with the individual at its heart? How do you avoid expensive post-event monitoring? The success of guidance, whether for DC members at the point of retirement or more broadly around any member choice event, will be down to the quality of the guider. Quality input will lead to higher quality outcomes. Guidance by competent guiders will generate confidence in the system. We already see examples of sharp practice in guidance with organisations offering free guidance, only to lead people toward financial products or worse. If this persists, guidance will be undermined.

PMI, TPAS and JLT have been developing a professional qualification in pension scheme member guidance aimed at experienced pensions administrators and others with suitable pensions knowledge. This qualification is broader in scope than guidance for DC pots at retirement, but a qualified administrator would be very well-placed to deliver guidance of the high standard envisaged in the consultation. It covers areas such as pension options, lifestyle factors, financial considerations, pension scheme member events, as well as demonstrable skills in communicating with members. If guiders have to show skills, perhaps through a quality mark, scammers would be out of business.

Who should provide the guidance?

Good guidance is already provided by specialist IFAs (in the context of incentive exercises) and by some non-commercial organisations. I believe that any organisation who meets minimum standards of qualified guiders and delivery processes could provide guidance on behalf of schemes and providers in an outsourced capacity. I believe there is a role for the commercial sector where there is scale and capacity, at the right level of skill.

As mentioned above, pension scheme administrators, in-house or third party, provide an obvious impartial source. I favour a default, low-cost service provided by the non-commercial sector, with an option for those schemes and providers who wish to select an alternative commercial model for their members to do so. It is important that schemes and providers, who will be required to offer and pay for the guidance, are able to select a partner to deliver the guidance, as this helps ensure quality delivery.

Selection by schemes and providers will also maintain a competitive tension to ensure that pricing remains keen and quality and innovation remain high. Leaving choice to schemes and providers is more likely to lead to expansion of guidance beyond the point of retirement and beyond DC. It would also encourage schemes that already provide expensive pre-retirement counselling to continue to do so.

Quality assurance

Monitoring of guidance quality is necessary, but how you undertake it can make a difference.  Guidance is not Advice; there is no need for a contract between the guider and the member. Guidance makes no recommendations. Instead, it is collecting relevant information, discussing options and reflecting member preferences in a conversation. The conversation may be recorded and may be summarised and shared back with the member, but it remains a conversation.

A system of independent accreditation of organisations, commercial or non-commercial, who deliver guidance could be put in place through spot checking of processes, guider credentials and guider performance by experts who understand guidance. Non-commercial guidance organisations would be well-placed to provide this oversight, as would the Pensions Regulator. FCA would be credible, but could inadvertently blur the important distinction between advice and guidance. This could result in fewer organisations willing to deliver guidance. This is happening already. Commercial firms like auditors could also undertake the independent assessment, but would cost more.

April 2015 is not far away. Whatever solution is preferred, it must be ready, even if in a cut down version initially, with aspiration to develop. Some administrators and others could be ready to provide the guidance on time, but perhaps permitting a period of time to meet all the quality standards (interim accreditation could be awarded for example where an organisation shows sufficient progress toward full guidance accreditation and has documented plans in place to complete the journey) would help get us where we need to be.

contact Margaret Snowdon
Director margaret_snowdon@jltgroup.com 020 7309 8105