Guidance guarantee lead

Guidance guarantee

Fri 16 Jan 2015

Pádraig Floyd takes a closer look at the world of preretirement counselling

Engagement with scheme members is no longer a simple job of sending out an annual statement. For those who are approaching retirement, it’s a different case altogether and one that cannot be addressed by a brief information session followed by tea and biscuits.

This is in part due to defined contribution (DC) increasing the level and frequency of engagement required. But the real game changer came in the March 2014 Budget announcement when Chancellor George Osborne introduced the concept of a guidance guarantee. Although the government had already allowed for £150 worth of guidance to be available as a tax-free benefit, the provision of high-quality guidance is likely to cost in the region of £700. This creates issues both from the perspective of who picks up the bill and who is delivering the guidance and whether that guidance is likely to be of sufficient quality.

The real question is around how schemes move from delivering generic guidance that allows members to make informed and rational decisions, to creating high-quality information that not only educates but engages the audience.*

By transforming the level of access individuals have to their pension fund from the age of 55, the Chancellor completely upended the level of counselling required for members. As the range of options varies from members choosing to buy an annuity at the point of retirement, right through to taking all of their pension fund as cash, the old-fashioned lifestyle approach of moving members towards a gilts-and-cash fund five years from retirement is now dead.

Newer approaches using more flexible and diverse default funds are also no longer fit for purpose. Schemes will not be allowed to leave members invested without regular reminders that investment strategies should be reviewed. In fact, schemes will now be held responsible for information given to members.

It is for this reason that any counselling offered by the employer or scheme must take into account an individual’s larger financial circumstances and not simply their pension savings. Naturally, employers will need to handle discussing such a topic in a sensitive manner.

Of course, with the budget came the announcement that guidance would be available via government-supported agencies like Citizens Advice, or via telephone and online with The Pensions Advisory Service (TPAS).

To be the most effective, engagement must begin from the moment an individual is enrolled and continue throughout their working life. 

Both of these organisations have a long and successful history in advising individuals on financial matters, and in the case of TPAS, pensions. However, schemes will not be off the hook by suggesting members simply approach these organisations. A framework should be put in place within the business to meet the requirements of the guidance guarantee.

The allowance of £150 worth of advice as a tax-free benefit may be useful, but is not going to go very far, particularly if spread over the working life of a member. The guidance guarantee put in place by the government is expected to include a degree of face-to-face time with whoever offers the advice. This must be factored into the cost and makes it look increasingly likely this burden will fall upon the plan sponsor.

Any preretirement counselling must fully integrate with whatever programme of member engagement is to be applied across the organisation. A scheme should also look to ensure its preretirement messages are not only compatible with the rest of its communications, but that all communications have a logical progression towards making decisions at retirement.

Schemes may consider the cost of face-to-face advice or guidance on an individual basis as too costly. However, training up internal experts and advisers to offer guidance might be an appealing alternative. This would not only address the need for delivery, but would ensure the communications are completely integrated.

Making use of face-to-face in the form of seminars targeted at specific milestones from retirement is another option. There are companies that tailor content to workforces and provide highly targeted guidance to influence the individual to seek more information, approach the employer to help them, or identify they have complex needs and seek independent advice.

Schemes should consider how Citizens Advice’s and TPAS’s offerings might be integrated within the process. There may be ways the scheme can make use of literature or helplines to offer support to members.

This extends far beyond the employer, with a long-recognised need for financial education before individuals even enter the working population. The  government has made strides towards introducing basic financial understanding into the national curriculum this year and pilot schemes of after-school savings clubs for four-year-olds have attracted support from certain community groups. To be the most effective, engagement must begin from the moment an individual is enrolled and continue throughout their working life.

This sounds onerous, but over time, a little and often is likely to be easier to plan, no more expensive and probably more successful than major campaigns.

Saving for retirement is, after all, a lifetime’s work. Surely, the engagement designed to reach that outcome must be equally consistent to ensure the objective is reached.

* Employers and schemes will need to ensure that they are not giving financial advice within the scope of the Financial Conduct Authority when they are not authorised to provide this advice.