Regulation should change to create three tiers of advice for those on different income levels if the...
Regulation should change to create three tiers of advice for those on different income levels if the UK is to have adequate pensions provision, according to the ABI's latest findings.
The report was compiled for the ABI by Oliver, Wyman & Company to address the savings gap, the shortfall in savings levels that government actuarial advice estimates at more than 50%.
Richard Surface, global head of the insurance practice at Oliver, Wyman & Company, said a three-tiered approach to advice was needed to make sure everyone had adequate and appropriate advice.
Oliver, Wyman & Company argue that simplified state support for those on the lowest incomes should be provided. For those on middle incomes, a new type of adviser, Financial Awareness Representatives (FARs), should be established. The existing regulatory regime would continue to be most appropriate for those on the highest incomes.
Advice remains essential to encourage adequate levels of savings, Surface said, and is particularly important for those on lower incomes. This could only happen through major reforms, promoting advice in this area. There is no other mechanism that would provide the required savings lift, he added.
Surface said the regulatory regime had made it increasingly uneconomical to provide advice to those on lower incomes because of the increasing cost of compliance.
This could be remedied as there is a distinction between the advice needed for those on lower incomes and those earning more, he said.
Those with lower incomes should be seen as 'saver agents', encouraging individuals to save rather than spend. Those on higher incomes saw advisers as 'financial planners', optimising the investment of savings. He said the role of saver agent was now virtually extinct as there was no incentive for provision of this type of advice.
Surface maintained that if the current system remains in place, a further 3.6m people will be excluded from advice and there could be a savings shortfall of £6bn. FARs could help to reduce this shortfall. He estimates that the introduction of 6,400 FARs would encourage £3bn in additional savings from low and middle income households.
The report found that UK savers are saving some £27bn too little for their retirement. Surface calculated that a 54% increase in the amount being saved will be needed if the country is to be able to 'secure an acceptable retirement income for all UK citizens.'
Surface said that more than half the 18m households in the UK will need to save 10% more of their annual incomes to have acceptable levels of retirement income. There will need to be a 54% increase in the amount currently being saved to close the gap, he added.
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