Horse-trading begins over pension guidance guarantee

You can lead a horse to water, but you can't make it drink. And you can provide a free, independent at-retirement guidance service - but you can't be sure that people will take it up, or act on its recommendations.

The Treasury and the Department for Work and Pensions have taken a bold decision by saying that the "guidance guarantee" - the general guidance offered to savers at retirement - should be provided by independent entities such as the Pensions Advisory Service and the Money Advice Service rather than the insurance or pensions industries.

That decision was correct. Most of those who responded to the government's consultation said they did not want guidance to be provided by an entity that had products to sell. Given the industry's inglorious history, that is hardly surprising.

But it doesn't mean the job is done and that we are safe from more headlines about mis-selling and cynical rip-offs. We still have to make sure these conversations, superficial but vital, actually take place. We have to make as many horses drink as possible. It will not be easy.

Past experience shows that voluntary codes of practice and self-regulation don't work. The Association of British Insurers adopted a code of practice in March 2013. It requires members to make the "open market option" more prominent in their documentation, ask customers key medical questions before selling them an annuity and stop putting annuity application forms in the "wake-up packs" sent to those nearing retirement.

Yet there is plenty of evidence that insurers ignore both the letter and the spirit of the code. Examples of opaque commission payments and "nudges" towards uncompetitive products drawn from a limited panel are not hard to find. It's no wonder that the annuities market is already the subject of a formal investigation.

So we are heading down the prescriptive route instead. The Financial Conduct Authority has suggested that providers should inform savers that free and impartial guidance is available, both in wake-up packs and during any telephone conversations; and that they should not attempt to dissuade people from taking guidance by suggesting it is worthless or unnecessary. It also says companies should provide more information about a pension fund, such as whether it has guarantees or "market value reduction" terms.

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The guidance conversation doesn't take place until the end of the "accumulation" phase of the pension journey. By then, a saver could have spent 20 or more years paying into a default fund that might not have been the best option for them, or carried charges that were far too high. They may have paid in far too little or started too late. Guidance will be coming too late in the day to change any of that.

Other changes to the system will help. Automatic enrolment into workplace pension schemes is designed to get people saving, although the contribution rates are too low. The flat-rate state pension gives people some certainty over their future state pension level. The proposed charge cap on workplace pension funds should help protect savers from excessive charges, although the cap should really be lower than 0.75 per cent.

< This is a huge amount of rulemaking, and it's tempting to ask whether all this regulatory apparatus - which is ultimately paid for by savers and taxpayers - is really necessary. Can't providers simply behave themselves? Fidelity would certainly like us to think it's possible: launching its retirement service this week, the company highlighted the things it already does to stop people making bad choices and challenged journalists to "judge us on what we do, not what we say".

It all sounded very refreshing, but to believe that the whole industry has turned over a new leaf would be a triumph of hope over experience. Poor products, high charges and bad practice are still far too common. In a sector where bad decisions can have life-long repercussions, it's vital that the rules of engagement are laid out very clearly at the start, not applied retrospectively in response to malpractice. To borrow another equine metaphor, that would be shutting the stable door after the horse has bolted.

Jonathan Eley is editor of FTMoney. Email: [email protected].

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