The introduction of a National Pension Savings Scheme (NPSS) will not get rid of the need for financial advice, claims Which?
Giving evidence at the Treasury Select Committee (TSC) inquiry into the design of a NPSS, Mick McAteer, senior policy adviser at the consumer body, said if people weren’t confident about making investment decisions there was nothing to stop them going and getting independent advice.
Supporting the idea of a NPSS model as proposed by the Pensions Commission and the Investment Management Association (IMA), McAteer even suggested the cost of the NPSS would be so cheap, it could afford to give people a £200 voucher for advice per year for the life of the fund.
But also speaking at the first evidence session, Ned Cazalet, of Cazalet Consulting, suggested the figures proposed by Lord Turner for a NPSS would not work on a cost basis because the issue of persistency seems to have been ignored.
Cazalet says the Turner report fails to satisfactorily explain why the "persistency problem" has disappeared overnight.
At the moment, of every 100 pensions started today, less than half will still be running in four years time.
He also warned anyone “believing Turner’s model can be delivered at a profit is deluded”, as the NPSS is just not a commercially viable venture, while he described the figures for the industry alternatives as also “abysmal”.
When asked by the Committee what level of cost would be achievable, Cazalet said there needed to be a collective centralised scheme, with less of a persistency problem caused by less churning because fewer providers would mean reduced competition. On this basis he guessed a figure of 0.6% would allow it to break even.
Referring to his report, Polly Put The Kettle On, Cazalet warned the TSC there would need to be a new way of operating in the pensions market, describing the current business model as unsustainable. Prompted by a question from John McFall,chairman of the Treasury Select Committee, which quoted a comment from Trevor Matthews of Standard Life recognising the “flawed and unsustainable” current commission based market, Cazalet agreed there was a great deal of concern in the model the insurance industry is operating.
He said there was evidence to show, not all, but some intermediaries seem to have “a cuckoo clock” telling them when they’ve passed the clawback period of a product for their commission, leaving them free to swap their business to another provider, without detriment to the client.
He said the system is fundamentally flawed as companies are competing to get intermediaries on their side, describing it as an “odd cartel” where they are trying to keep their share of the market by offering higher and higher commission.
Cazalet said: “It’s not economic and it’s not sustainable, with companies struggling for survival with more and more emphasis placed on new business figures.”
Quoting figures from his report, Cazalet said between 2001 and 2004 life companies spent £30bn in seeking new business, which includes commission and marketing costs. This works out to £7bn a year and to around £1,000 per household to sustain a business model which is “crumbling at the edges”.
He said the current model is economically defunct as providers are constantly looking towards intermediaries, and although the Turner proposals is a nice idea, and forcing through the model would break the current trend, the question is whether you can get an infrastructure provider to run it without mediation, and without the charging levels increasing to pay more commission.
McAteer also used this threat of increased cost as one reason why a retail model such as the one proposed by the Association of British Insurers (ABI), won’t work, as he claims the only way to attract customers to an open market system is through marketing or distribution networks where there is no added value for the customer.
And he warned, based on the current business model described by Cazalet, life companies would still have to offer incentives to advisers in order to gain market share, adding even if it is not in the form of commission it would still be an added cost.
When asked about the ability of consumers to make investment decisions on their own, Cazalet said he believed consumers don’t have the necessary expertise to make decisions on asset allocations and fund choice.
McAteer disagreed, however, arguing he believed consumers are capable of making decisions on their own, provided there is limited choice and a decent communication system.
He pointed out one of the main purposes of the NPSS is to filter choices down to a simple selection, although he admitted no system is perfect, he pointed out all the alternative models have degrees of choice, some more than others.
McAteer said whatever model is selected, the consumer has to make a decision, as they have to choose the provider or company and the asset class. With a stakeholder pension, for example, he notes there tend to be around 20 investment options per provider, and while in an NPSS they would have less, maybe 10, in a retail model like the one proposed by the ABI, they could have up to 500 funds, which is when people would definitely need financial advice.
To help people make these choices, McAteer suggested there needs to be clear signals from the Pensions Regulator and the government as what options are risky, as the majority of people can make basic decisions based on risk and safety.
Although he claims advice would still be available to people not confident enough to make decisions on their own, even going so far as suggesting the low cost of a NPSS could allow people to receive £200 advice vouchers each year for the life of the fund.
However, when asked about the suitability of a NPSS for the target market, Cazalet said he couldn’t possibly see how any model could operate while means-testing was still in place and a culture of growing indebtedness continues.
He said there is too much grey area around means-testing to just trawl everybody in regardless of whether they’re suitable for the scheme or not, and he claimed there were very polarised views within the industry on whether the NPSS is what it really wants.
McAteer also said greater clarity on state benefits would be helpful in determining suitability, adding he couldn’t comment further as the decision was a policy one.
Although when asked, by Committee member Jim Cousins, whether he would still support the NPSS if the government did not implement the Turner proposals for reform of the State Pension System, McAteer said he would still be willing to contemplate the benefits of the model.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected]IFAonline
Caring for children and elderly relatives
Similar to June 2007
Square Mile’s series of informal interviews
Fine reduced to £60,000
Two roles created