Steve Folkard looks at some of the challenges facing the personal accounts delivery authority
I recently had an email from Personal Accounts Delivery Authority (PADA). It was a response to all participants in the consultation on retirement income options for personal accounts members, and had been sent to all those who submitted a response.
AXA submitted a response because I think that PADA faces a significant challenge in providing a low cost solution to a sector of the market that is largely apathetic about its retirement choices. With many small annuitants being unable to obtain advice because the cost of advice cannot be supported by small plans, creating the route to the right choice becomes a key design objective for PADA.
PADA has been straightforward and openly consultative on the issues it faces. Culturally, PADA has been very willing to draw upon industry expertise, and continues to do so as it moves forward with a consultation on investment choices. The trustee board has a difficult task in balancing the interests of the many with the preference of the few, and on retirement options it has the task of dealing effectively with the majority while minimising adverse outcomes.
These would be difficult decisions for the trustees of any large occupational scheme but the burden borne by PADA and the trustee board will be that, unlike the trustees of most other occupational schemes, its decisions will be subject to detailed scrutiny at the hands of both industry and politicians. That is not to say that PADA should be any less accountable, but there is an impact that the gaze of public opinion may have on the trustees which is difficult to predict. I would venture that they may err towards more cautious decision-making than might otherwise be the case.
Lifetime annuities will be the suitable option for many; trivial commutation a real option for a large number, but those who wish to exercise an open market option may find a panel approach with a number of providers available to them.
But what to do with people who do not have straightforward retirement needs?
Some people may be in the middle of a divorce or have a partner with a long term illness in poor health. Some potential annuitants may be in poor health themselves and need to be made aware of ill health options available to them to generate better value if appropriate. Perhaps a helpline may cover this type of issue; perhaps a sophisticated online flowchart can be created. It is certainly being considered and is likely to be an information service.
Funding the purchase of small annuities from small pots poses additional challenges. The margins on annuities are very sensitive to administration costs. In addition, any increased capital requirements arising from Solvency II regulation could increase annuity costs further, putting pressure on margins for smaller cases.
Thus PADA is beginning to experience the commercial challenges of bringing a consumer focused proposition to the mass market. The helpline will need to inform, possibly even guide retirees, but it will not want to carry a liability for advice. That is because, even with heavily scripted, flowcharted processes, there will still be the question that can't be answered by an information service. Questions like: "So what is the best option for me? I'm not sure, what do you think I should do?"
These are the normal, everyday questions that annuitants pose. The right advice will not always be perfect. It will often be a compromise between different options available. I think that an objective for PADA's retirement service should be to ensure the majority of people have the best chance of a good outcome. This strikes me as far more sensible than trying to eliminate every risk of a small number of people receiving a poor outcome.
This drew me to another interesting observation. There is significant synergy between the requirement for a guided sales process, as being investigated by the FSA, in connection with new distribution options under the Retail Distribution Review (RDR), and the guidance required by retirees under personal accounts. Perhaps an advised guided sales process presents the answer to the issue of how to deal with a clear mass market requirement for guidance, while keeping costs low and recognising that no process is economic when it attempts to eradicate ALL risk.
The key to developing such a process is to start from a point which accepts that all risk cannot be removed from the process. This is not a new principle, but it strikes at the centre of the balance between an environment where the provider of the financial service is liable for all assessment of suitability.
A model which holds the provider fully liable is not commercially viable at low cost, since it is time consuming and, therefore, expensive to eliminate all risk. A model which allows a recommendation to be made from limited information can be effectively offered at lower cost, but not unless the circumstances where a liability for that recommendation can be reduced.
This is a difficult choice for regulators at the current time, when the public are growing hugely sceptical about the role of institutions generally. Perhaps it is the right time to give people more responsibility for their decisions, and allow an advised guided sales framework which has a chance of engaging them sensibly at a price they are prepared to pay?
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