Simplification is the key - Centre for Policy Studies

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year. 91 Clearly, there are considerable incentives to consider alternatives to a pension fund, particularly for basic rate taxpayers. 4.6 Retail distribution The quality of the retail distribution of pensions and savings products has, for a long time, been poor. Many former insurance salesmen metamorphosed into Independent Financial Advisers (IFAs), peddling products that they often did not fully understand, 92 supported by opaque remuneration structures. Whilst not attached to any particular provider, some IFAs’ independence was nullified by the pursuit of their own financial interests, at their clients’ expense. Some, for example, continue to collect trail commission many years after a sale, yet are unobtainable for further advice. Consequently, the IFA label has developed, at best, a mixed reputation. It is perhaps unsurprising that few financial advice firms are profitable, and a significant number are poorly capitalised; some 40% have regulatory capital of less than £50,000. 93 4.7 The Retail Distribution Review (RDR) The industry now faces the Retail Distribution Review (RDR). The RDR is a fundamental review by the FSA of the effectiveness of distribution and associated regulatory issues, conducted via a variety of industry feedback sessions and consultation papers. 94 Its scope has been extended to include group personal pensions (GPPs), which makes sense given that many of the flaws in the individual pension market are mirrored in the GPP market. Due for implementation in 2012, with significant one-off costs to the industry, 95 the RDR is intended to place a clear dividing line between sales and advice, and heralds major implications for the industry, particularly distributors. Its main proposals include: (i) (ii) banning commission-based salespeople, to be replaced by fee-based professional advisers; banning factoring, whereby providers advance funds to advisers to cover the initial cost of advice (so that consumers may pay over time). This should reduce 91 92 93 94 95 KPMG, The lost decade for pensions? December 2009. In should be noted that some industry participants have made considerable investment in helping advisers enhance their qualifications, notably SimplyBiz’s not for profit New Model Business Academy. Ernst & Young, The Changing Market Dynamics in Life & Pensions, CFP Licensee Day, June 2009. Notably CP09/18 “Delivering the RDR”, June 2009. Perhaps £500 million. 2012 may prove to be a “perfect storm” year for an industry already facing preparation for Solvency II, the arrival of the NEST (formerly the Personal Account) and implementation of “Treating Customers Fairly”. 33
provider influence, thereby improving the prospect of advisers acting in their clients’ interests, but does not address the fundamental problem that a one-off payment for advice (an alternative to factoring) can put people off seeking it; (iii) imposing blanket requirements on qualifications (QCA Level 4 will become the benchmark), with no grandfathering (even if an IFA has many years of experience). The RDR is expected to improve professionalism and public trust in the industry, but it leaves behind a generation harnessed with moribund, over-priced retirement savings products 96 and does little to help modest savers. The RDR is also unlikely to change the reality that banks currently do not want the costs and risks associated with retail distribution of, and giving advice for, long-term savings products. When fashioning the RDR, the FSA tried to come up with proposals that will improve both the quality and quantity of financial advice available to consumers. 97 “Quality” has probably been addressed successfully and there will almost be clear blue water between “independent” and “restricted” advice; as for “quantity”, the RDR is set to fail. 4.8 Consequences of the RDR Some industry estimates suggest that up to 30% of the 30,000 IFAs are expected to leave the sector upon RDR implementation, 98 making end-2012 a “cliff edge” date, both for those within the industry and their (typically elderly) clients, who will then be without an IFA relationship. One reason for these unintended consequences appears to be the FSA’s misconception of what an IFA’s role really is. Today many IFA’s offer advice as a gateway to sales commission rather than as a service in its own right. If following the RDR the IFA is required to give higher quality advice and to charge the customer for it directly, then many customers who cannot afford this will drop out of the market or choose to buy simple products direct from banks and other distributors. As a result, the number of advisors is likely to drop, and the population they serve (and encourage to take on pension and other savings contracts) will decline. Indeed, it will accelerate a trend that has already developed; in ten years time there may be only a few thousand genuine advice-giving IFAs left. They will be focused on the 96 97 98 Such as FSAVCs with no access to a 25% tax-free lump sum at SPA. Objectives laid out by Sir Callum McCarthy, FS Chairman, in a 2006 speech at Gleneagles. A further 15,000 tied or multi-tied advisers are estimated to operate within banks. 34
Page 1 and 2: Simplification is the key Stimulati
Page 3 and 4: THE AUTHOR Michael Johnson trained
Page 5 and 6: A note concerning data Finding a co
Page 7 and 8: These proposals depend upon having
Page 9 and 10: SUMMARY The UK’s long-term savin
Page 11 and 12: any annuitisation requirement, prov
Page 13 and 14: Thus, had pension savings products
Page 16 and 17: INTRODUCTION There has been a flood
Page 18 and 19: PART ONE: THE LONG-TERM SAVINGS LAN
Page 20 and 21: Japan’s savings ratio was once th
Page 22 and 23: scheme contribution rates are lower
Page 24 and 25: Table 1: Funded pension scheme asse
Page 26 and 27: 1.9 The international perspective A
Page 28 and 29: Table 4: ISA savers’ income distr
Page 30 and 31: Table 6: The complexity of the tax
Page 32 and 33: Figure 4: Income options upon retir
Page 34 and 35: savings by delivering a framework t
Page 36 and 37: Figure 7: When non-savers might sta
Page 38 and 39: There are other aspects to consider
Page 40 and 41: 3. THE EMPLOYERS’ PERSPECTIVE 3.1
Page 42 and 43: When employees with DC funds retire
Page 44 and 45: More specifically, employers are no
Page 46 and 47: Both businesses do have important c
Page 50 and 51: elderly and the wealthy, not least
Page 52 and 53: 5. THE TREASURY’S PERSPECTIVE 5.1
Page 54 and 55: Whilst the UK’s NRR for the mean
Page 56 and 57: Currently, reducing pensioner pover
Page 58 and 59: Table 13: Net cost of tax relief un
Page 60 and 61: TEE would be hugely attractive to p
Page 62 and 63: 5.6 Tax treatment: international pe
Page 64 and 65: PART II THE PROPOSALS AND THEIR IMP
Page 66 and 67: Proposal 6: post-retirement, amend
Page 68 and 69: 7. TAX SIMPLIFICATION: SOME OPTIONS
Page 70 and 71: 8. THE IMPLICATIONS FOR SAVERS Impl
Page 72 and 73: The higher rate taxpayers’ perspe
Page 74 and 75: segregated from any employer-sponso
Page 76 and 77: epresent a further step down the pa
Page 78 and 79: 10. THE IMPLICATIONS FOR THE PENSIO
Page 80 and 81: Such principles would have to ensur
Page 82 and 83: Figure 13: The cost of pension savi
Page 84 and 85: pool of underlying pension assets (
Page 86 and 87: hardship” facility, whereby cash
Page 88 and 89: occupational pension scheme benefit
Page 90 and 91: CONCLUSION We would save more, for
Page 92 and 93: ACKNOWLEDGEMENTS This paper was cat
Page 94 and 95: APPENDIX I Summary of proposals fro
Page 96 and 97: APPENDIX II Value of assets in priv
Page 98 and 99:
depending upon age at the time that
Page 100 and 101:
APPENDIX V PRE-RETIREMENT ACCESS TO
Page 102 and 103:
APPENDIX VII FINANCIAL PLANNING TOO
Page 104 and 105:
APPENDIX VIII THE MODEL 173 The
Page 106 and 107:
GLOSSARY Alternatively Secured Pens
Page 108 and 109:
pensions and earnings, but excludes
Page 110 and 111:
those with earnings above £4,940 b
Page 112 and 113:
in cash terms, i.e. fixed at £770
Page 114:
The UK savings industry is barely t
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