If guidance is a single event, as it appears to be in the Government’s plans, how will that guidance assist an individual seeking the necessary way, perhaps 20 years later, to switch from a draw-down product to an annuity?
Caroline Rookes: Shall I start? One thing we are clear on is that retirement is no longer a one-off event. With the changes in the Budget, increased longevity and various other things, people are more and more approaching retirement in stages, and we at the Money Advice Service are clear that the guidance and support we provide has got to cover people through those stages. It has to start early, before people are even thinking about the point of retirement, to try to get people to ensure they are saving enough for retirement. We want to help people at the point when they consider retirement, and beyond that when their needs or circumstances change, up to the point where they may be considering extra costs.
The way we are developing our support and services is, in a sense, to provide people with the journey through from before retirement right up to the point that they are older and need to think about the extra costs of care, rather than a one-off. The way I see the guaranteed guidance working is that that will be the basic building block. It is a point in time when people will be thinking about retirement and they will get their guidance guarantee, but a lot of them will inevitably need help on top of that and we will be there to provide it for them.
Michelle Cracknell: I would like to answer the question in two parts, because we will have two roles. First, there is our role of delivering, on behalf of the Treasury, the guidance service at the point that it is triggered by either the provider or the scheme. We will be providing guidance at that point and getting people to think about their retirement plan.
The second service is that we are already the Pensions Advisory Service that can deliver guidance at any time. We share the ambition of the Money Advice Service to try to get people to plan earlier and more consistently. One of the tricks of the guidance, if you like, and to get it to have real resonance, will be for it to have a halo effect, not just for the delivery of the at-retirement service that is being run by the Treasury but of more people taking opportunity of the guidance that is already being provided by the Pensions Advisory Service and the Money Advice Service.
Thank you. If you will allow, Chair, I would like to put a follow-up question to both organisations. We know that the annuities market, as things stood and stand until the changes, to an extent failed because individuals did not exercise the open market option and shop around. Why do we think that this offer of a form of open-market guidance will be more successful?
Caroline Rookes: My view is that we have got a lot to build on in terms of understanding how much consumers know and how much—more importantly—that they do not know. We have a lot of behavioural economics now to understand what will help people to engage and how we can approach people so they will engage. The changes to pensions that were announced in the Budget and last week have generated a lot more interest, so we are in a good place to engage people to take up the offer. We cannot guarantee that they will take it up, but I think there will be a lot of interest in taking it up. We have done a lot of consumer research that tells us that people are confused and will need guidance and support. We hope that the letters that will go out to tell people about the guidance guarantee will be simple and will try to get people to take advantage of it. As Michelle said, we need to ensure that even if people do not take up the guidance guarantee there is a lot of support that they can use instead of the guidance guarantee.
Michelle Cracknell: At the moment, 15% of our calls are from people at retirement age. The overwhelming evidence that we have about those calls is that people find the current retirement process, the volume of information they receive and the language in the packs impenetrable, so they put it on the too-hard pile. Alongside the guidance, we need to look at how strong the providers’ call to action will be to ensure people take up the scheme. We must not overwhelm people with a huge amount of information about their pension scheme at the outset, because that will cause an adverse reaction and people will not act at all. In addition to the introduction of the guidance, we would like the information that people receive at retirement to be streamlined.
Finally, is there a danger that if the pension providers’ call to action is not strong enough, a substantial number of people will be rolled over in an inertia-based system into a product that looks a lot like an existing annuity?
Michelle Cracknell: I agree. If the call to action is not strong enough, not enough people will take up the guidance. The implication of that, I fear, is that more people will cash in their pension fund or make the wrong product decision. Therefore, we urge the FCA to have a strong call to action for the guidance service.
When you give advice about how to make best use of pension savings, does it include the comparative advisability of whether a person should continue to pay existing debt—mortgages, credit cards or other loans—or whether they should use capital from their pension pot to pay it off, and what impact that will have on their benefit entitlements in the future? I have a separate question about other forms of financial advice. I have a lot of constituents who had fairly modest incomes throughout their working lives, so have fairly modest pensions, but are classically asset rich, cash poor because their homes have increased in value beyond their wildest dreams, so they may be looking for schemes that will protect their children from inheritance tax. Some consider equity release schemes on the value of their properties. Does the package of advice you give to people include that sort of advice?
Caroline Rookes: The short answer is yes. We certainly look with the individual at their circumstances in the round, and it is critical that we look at their liabilities. A lot of older people take mortgages into retirement, which is an issue. We look at their debts and we get them to consider their assets. We help them to understand the options that are available to them and the pros and cons. We cannot recommend specific products to them, and with something such as equity release or income drawdown, there is usually a need for a product recommendation. So what we will do at the Money Advice Service is to give people information, or talk them through the information, and then refer them to regulated advice, where that is necessary, and it probably will be necessary for both equity release and income drawdown.
However, one of the things that we are doing, and we will have it in place in time for April, is that we are developing a new retirement adviser directory, which will be a single directory of regulated advisers who are prepared to offer regulated advice to people regardless of how modest their circumstances are. We are working with the advice community and many others now to put that directory together. So we hope that, going forward, we will make it very clear to people when they need to consult regulated advice, and we will make it much easier for them to do that.
With regard to the guidance guarantee, if people do not initially take it up, how will you reach out? What sort of methods will you use to reach out to those people who have not taken up the initial guidance?
Michelle Cracknell: I think that it is going to be the role of the FCA to decide on the standards that will apply to the providers and schemes to trigger the guidance sessions. For our business as usual, we will continue to promote the access to guidance that is available to members of the public, but it will need a concerted effort by the providers and schemes to push people into the guidance, because our experience is that people tend to act when an event is happening. That is why the providers and schemes play a very important role in putting people into the guidance system.
Michelle Cracknell: We do see that as part of our role under business as usual, but I also see it as part of the guidance service being delivered by the Treasury. It is part of the Treasury’s role, in conjunction with the FCA, which will set the standards for the providers and the schemes to trigger the call to action.
But in terms of your bit—your responsibility—how will you engage with people? What sort of methods will you use? Will you ring them up? How are you going to do that?
Michelle Cracknell: What we do currently, under business as usual, is to promote our helpline, and through comments in the media and by appearing in industry packs, we will show we are available, as is the Money Advice Service, if they seek guidance. So we will continue to do that under business as usual.
Caroline Rookes: The other thing that we do, again as part of business as usual, is to partner with a lot of organisations that are dealing with the particular segment of the population that we want to work or engage with. So we will work with Age UK, other charities dealing with older people and with local authorities, to try to ensure that people are absolutely aware of the help that is available.
Twice during answers, I heard you say that setting the standards is clearly the responsibility of the FCA, and the Committee questioned the FCA about its philosophical approach. You are obviously responsible for delivering the guidance. Can we just be clear about what conversations you have had with the FCA about what you think should be in the guidance guarantee?
Michelle Cracknell: May I answer that in two ways? We are having two sets of conversations at the moment: one is with the Treasury, about the design and build of the guidance service that we will deliver; and the second is that we put our submission in to the FCA and spoke to its officials prior to our submission about the quality of the people delivering the guidance, the qualifications they would need and what should be in the content of the guidance. In addition, we referenced, as I talked about earlier, the necessary call to action to enforce schemes and providers to get their members and policyholders taking up the guidance.
Given the potentially truncated time period, and given that you do have a role to play under business as usual, what are you doing to inform people who are giving guidance about what will be in the Bill and about their responsibilities prior to the guidance guarantee coming into place?
You have spoken several times about business as usual, which is giving guidance. Clearly, that guidance will now have to extend to the limits or the entire remit of the Bill. I wonder what you are doing, in front of the guidance guarantee, to ensure that people who give guidance recognise that they will have to make sure they have the skills to take account of what is in the Bill.
Michelle Cracknell: Right. Under business as usual, we are picking up a lot of calls from people asking what they can do in April 2015 and about the implications. We are dealing with those with our current helpline, which is staffed by pensions specialists who typically have 10 years’ worth of pensions experience. Those people are giving guidance on the issues relating to people’s pension schemes, but also opening up people’s minds to some of the other things they should think about.
In reference to one of the earlier questions, we are increasingly finding that people are talking to us about their retirement plans and the fact that they have continuing debt. We acknowledge that and we reference and signpost them to the people they need to talk to, either about rearranging their mortgage or, in extreme cases, getting debt counselling regarding their mortgage. We play a signposting role and look at the overall retirement position, and specifically answer questions about the new options that are available from April 2015.
Perhaps I may turn to the business of April 2015. I do not think that the phrase “business as usual” will apply in April 2015; it will be business as never before. There will be a combination of new pension flexibilities coming in, the Taxation of Pensions Bill coming out, and lots of providers referring individuals to you. What preparations have both your organisations made for what could be a perfect storm? It will be like a combination of passports in the summer and immigration at the Olympics, all heading your way. Are we going to see website crashes, telephone overloads, everybody arriving at once and—goodness knows—even politicians and the media in April 2015 possibly being keen to deploy the word “shambles”? What sort of discussions have you had among yourselves with the Department for Work and Pensions and others to ensure that it will not be possible for that word to be applied with accuracy?
Caroline Rookes: As you will have heard last week, we are not directly delivering the guidance guarantee. However, we certainly anticipate an upsurge in business. We are revising our website and building a number of new tools to help people with the retirement journey, and ensuring that it has extra capacity. The contracts for the face-to-face and telephone services are very flexible. We have had discussions with the providers about contingency arrangements, should we need to build in more capacity.
Michelle Cracknell: The Treasury is apparently trying to estimate what the volumes would be, and between now and April 2015 the Treasury will be running pilots to try to test what the volume and take-up will be. In addition, they are looking at people getting the guidance in advance of April 2015, if they are going to make the decision in April 2015 to take action on their pension fund. We have been working with the Treasury, both on the pilots and of course we are also picking up the budget calls anyway.
I think our concern is that people do have access to the guidance prior to acting in April 2015, because of course the decisions they could be taking in April 2015 may be irreversible. We are very keen that people call us in advance of that date, either under one of the pilots or under business as usual, before they rush to take action by contacting their provider and scheme in April 2015.
May I recommend that you look really closely at stress testing every conceivable scenario? I think it is going to be much greater in those first few weeks than just beefing up the number of people on the telephones.
What sort of interface is there between your two organisations? What is to prevent somebody from ringing, first, the Money Advice Service and getting one lot of guidance and then, secondly, calling the Pensions Advisory Service and getting different advice, and then publicising the fact that they are getting different advice? How are you going to check whether people have received one lot of advice, two or possibly three, with one from a citizens advice bureau? What sort of interface is there?
Caroline Rookes: Michelle is probably better able to talk about working with the CAB but I would assure you that, at the moment, irrespective of the new changes, we work very closely together and have what we call a warm hand-off. So if somebody comes through to us by telephone and it is clear that what they need is a more technical discussion on pensions, we will deal with the general issues and then hand them straight across to the Pensions Advisory Service and vice versa.
Michelle Cracknell: I agree with Caroline. We do not know whether there is a going to be an integrated CRM system holding the details of the people who have specifically opted for the guidance service. We currently keep records of everybody that calls us, so we know whether they call us more than once. As Caroline said, when the query goes beyond pensions, we will try to signpost them to Money Advice Service and sometimes to CAB or other people that can help.
May we move on to the question of defaults? We have thought very hard about what happens when people make no active choices when they are accumulating their pension pot. I would be interested in your reflections on people who reach 55 or an age when they might reasonably think about doing something with their pension. Are you content that the situation is satisfactory as things stand if they do nothing, or do you think we need more protections in place for people who just do not act, who just leave their cash somewhere, so perhaps it is not being invested in a very useful way for them because their provider thinks they might take it out at any minute? Do we need to do any more on defaults at that point?
Caroline Rookes: My view would be yes, we need to look at it. We know that inertia governs a lot of what people do and do not do. A lot of people will be confused by the choices. Inevitably there will be people who do not use the support and guidance that is there and we need to ensure, as far as possible, that they do not end up in a very difficult place because they have not made an active choice.
Michelle Cracknell: Providers of the schemes have a duty to communicate with their customers. They have talked a lot about that, relative to the guidance, and so their role in continually reminding people about the benefits they have available is important, to stop people not acting. However, at the moment, one of the things we see more often is that people get a retirement pack and think that they have to take the benefits, when, of course, their selected retirement date and their real retirement date are some way apart, the latter being later in their life span. Therefore it will be important that those people do not rush into actually taking benefits.
There is another issue that the industry needs to address about the investment options that people have in respect of their schemes. Particularly if you have been a deferred member in a scheme, when you reach your selected retirement date, you could find that your fund effectively is all in cash or fixed interest. If you are not taking the benefits, that scheme will need to communicate with you what options are available if you are extending and leaving the money invested.
Briefly, if I may. Some people say that there are not enough people out there to provide guidance. Can you, perhaps particularly Michelle, give the Committee a feel for your view on capacity on the provision side? Are there enough people out there who can do the job?
Michelle Cracknell: We believe that there are enough pension specialists available to deliver the guidance. We have just started to recruit 16 new people to our helpline team in preparation. That is our first wave of recruitment and we have received a high number of applicants. I cannot tell you the exact number that has been available, but that was without advertising. Subsequently, we will go out and search for more people, so that we have sufficient numbers. Our feeling for the number of people that we would require to deliver our part of the guidance service is that there are enough pension specialists to recruit.
May I follow up the Minister’s questions? What overall volume of people do you think you will be dealing with who will need advice? I appreciate that you say you have recruited 16 people. However, there are other schemes where there is a lack of capacity, but it was said that there was enough.
Michelle Cracknell: The Treasury is trying to reach a number as to what it thinks the take-up rate will be. Our ambition is that the take-up rate will be very high, with over 75% of people taking the guidance. However, we do not think that that will be the position from day one. We think that because of the nature of the calls we are receiving at the moment from people where the defined contribution pension is a very small element, who have other pension provision elsewhere. That suggests that there will be less interest in taking the guidance, because it is a smaller decision for the individual to take. Our initial estimate of the take-up rate of the guidance service is more likely to be around 25%. We will then need to work hard to drive it up, especially as defined contribution becomes a bigger element in people’s pension provision.
May I ask another question? It is more general and related not just to the guidance guarantee. There is going to be additional risk for individual pension savers. In terms of all the measures available—guidance guarantee being one of them and your responsibility around that—do you all think that there are sufficient safeguards within the system? What else needs to happen in terms of regulation and the implications for the regulators and the industry as well?
Michelle Cracknell: You are right to highlight this. Certainly, since the Budget and even before then, we were increasingly getting people calling us who were suspicious because they had received cold calling about pension reviews and other pension scams. The issue we will have from April 2015 is of course that it is completely legal to cash in your pension fund and invest in an unregulated investment. Therefore, we will see individuals moving themselves unknowingly into an area where there is no protection and no regulator.
Our difficulty is that, however much regulation is put in place, it is a bit like a balloon being squeezed; something will pop out elsewhere. I believe there is a big duty ahead. We have been working with the pensions regulator in raising people’s awareness about cold-caller approaches on reviews of pension schemes and about the investments being offered, particularly those that move people into an unregulated environment with no recourse if it goes wrong.
Caroline Rookes: To add to that, I agree with what Michelle has said. It is vital that we share intelligence across the industry, across regulators and across the Government, so that where scams or issues appear to emerge, we can all quickly and consistently get on top of them and ensure that people are signposted to the right help. I think we will need to be vigilant in the early days and monitor very closely what is happening.
Michelle Cracknell: To add to that, the pensions industry is putting in a code of conduct, which is aimed at tackling pension liberation and the questions and due diligence that a scheme should do before transferring out to another scheme. The extension of that, in the new reforms that come in from April 2015, comes back to the point about the call to action for the guidance. We would look to the FCA to put in standards, so that the schemes and providers push people to get the guidance before they take the action, which could be irreversible and, worse still, could move them out of a regulated environment into an unregulated one.
We have heard about the fairly wide-scale recruitment of pension advisers to meet the anticipated demand. Could we hear a little bit about any training that is being given to ensure that there is consistency in the quality of advice that is given?
Michelle Cracknell: We already have plans in place from our existing business about how we train new pension specialists into our helpline service. We recruit people who typically have 10 years of pensions knowledge. We recruit them on the aptitude of being able to speak to the public. When they join us, they go through a programme of being trained about the skills of communication with the public, both in written format and verbally. For example, all the people on our helpline go through Samaritans training as part of their work, and that is refreshed on a regular basis. We will be doing the same thing for the staff that we recruit on the guidance. They will go through the same training programme. It usually takes about two months, and it goes from desk-based exercises to watching other people doing the job, close supervision and then mentoring. We think it takes about two months, once someone has joined us, to get them ready to answer telephone calls on the helpline.
May I come back to the issue of communication between the provider and the pensioner to signpost them to advice? What would be the minimum that you would require a provider to do to ensure that that is brought to people’s attention? I think, Ms Cracknell, you mentioned that an individual should not be allowed to take their pension pot from a provider until the provider is satisfied that they have taken guidance. Could you elaborate on how we would achieve that?
Michelle Cracknell: You alert them to the fact that the guidance is available, and if they say, “No, I just want to act,” you again prompt them: “You should get guidance before you act.” It works in a very similar way at the moment on pension transfers. If you do a pension transfer from a provider, a provider will talk to you at least twice and ask, “Have you taken advice prior to doing the pension transfer?” We would see something similar happening on the guidance.
The second part, which I referred to in the answer about the communication pack, is that we think the communication pack needs to be simplified. We think that one of the causes of inaction and default behaviour is the volume of information sent out at retirement. Individuals find it overwhelming and it has the adverse reaction of people either not acting in a prompt way, and therefore leaving it too late, or not acting at all.
Michelle Cracknell: We put it in our submission to the FCA and we have been speaking to the Association of British Insurers about it. In fact, prior to the Budget, we talked to them about the volume of information sent out at retirement and how the experience on our helpline was that people were finding that overwhelming and not helpful.
You mentioned earlier that you estimate that 25% will take up the guidance. Has any work has been done on what type of guidance that 25% will take up? Will it be telephone guidance, face-to-face or internet-based? Has the Money Advice Service done any work on what type of guidance people are likely to take up?
Caroline Rookes: We have not done work specifically on the guaranteed guidance, because we are not specifically providing the guidance guarantee. In our view, in the normal course of events, the majority of people who come for support and advice on pensions come digitally, but it is for the Treasury, working with the delivery partners, to work out what assumptions they make about the number of people that want to use each channel. I believe that work has been done within the Treasury on customer preference—the number of people who say they would like face-to-face or telephone guidance. Can you elaborate, Michelle?
Michelle Cracknell: It will depend upon the process that is put in place by the Treasury for the delivery of the guidance, because that will have an influence on the choice of channel that individuals will make. I have not got enough information; we have not seen enough of the design process to make an estimate of the different channels.
Do you have any estimate of how long an average telephone conversation to provide guidance would be, how long an average interview would be and whether these will be single interviews or collective discussions? Do we have any elaboration of the detail of how guidance will be delivered?
Michelle Cracknell: Yes. We have got, from our existing experience, an average length of phone call for the at-retirement calls, which tend to be the longest calls that we take on our helpline. The average length of call is 25 minutes, and during that time, we can cover all the major issues that an individual needs to think about. In our proposals to the Treasury, we estimated that, in total, a call, including the preparation time and the wind-up of producing an output document, will take about 45 minutes per customer. That is what we have put in our estimates for the delivery of the service.
Depending on how the proportions work out, the number doing telephone and individual interviews—because I expect that an interview would be even longer than a telephone conversation—we are talking about a significant additional resource. Has any work been done on how much the guidance guarantee will actually cost the industry?
Michelle Cracknell: We have worked out, based on the different levels of guidance conversations that the Treasury want us to do, how many people we will need and what the costs would be, and we have put those forward to the Treasury. Obviously, we are waiting to hear which of those assumptions they want us to run with, so that we can recruit and finalise the actual cost of delivery for the work we do. Just to put it into some form of proportion, during the financial year 2013-14, we dealt with 80,000 on a budget of £3.6 million.
I will be brief. I want to make an observation: so many of the answers that both organisations are giving understandably default back to the Treasury making a decision about things. It is therefore difficult for the Committee to get a sense of a number of factors, because the ghost in the machine, the elephant in the room, or whatever metaphor one wishes to use, is the Treasury.
Michelle, you suggested that you thought that 100,000 of the 400,000 savers coming up towards retirement would use the guidance guarantee—your estimate was a quarter. What does that suggest about the likelihood of good decisions being made by the other 300,000?
Michelle Cracknell: For a lot of people in the initial wave—the first tranche of people coming up to retirement post-2015—the defined-contribution pension is only a small element of their overall pension provision. It becomes a lot more critical as we move towards 2020, when the defined contribution will be for a lot of people the large or only part of their pension provision. We would love the guidance take-up rates to be higher than 25%, but that is our realistic proportion. Of the other 300,000, the level of implication for their retirement will not be as great, but we must get it right by 2020, when it will be very significant if only a few people take up the guidance.
Caroline Rookes: To add to that, we will not necessarily know the number of people who are not taking up guidance, or perhaps taking it up digitally through the new Treasury system, but who are seeking guidance and support elsewhere. If they are getting guidance and support—there is a lot out there—they should be able to make good decisions. Of course, some people will go straight for regulated advice; they are not all going to go through the guaranteed guidance solution.
Briefly, where an individual has received advice but is unable to make a decision and needs time to think about it, can they come back for further advice? Is there any limit to how much advice one person can access?
Caroline Rookes: My understanding of the guaranteed guidance is that it will be a one-off. People will come out of it with a range of options that they should consider, but also with some clear advice as to where to go to next if they need help. That will be to our services or back to the Pensions Advisory Service, or perhaps to regulated advice or elsewhere.
Ms Cracknell, in answer to a previous question, you explained that the pension advisers you are looking to hire will need 10 years’ experience, and that there will be a two-month training programme. How many people do you expect to have to hire and what salary scale do you expect to have to pay to entice people into the job?
Michelle Cracknell: We currently have two levels of people who work on our helpline: what we describe as technical specialists and assistant technical specialists. The current pay range is that an assistant technical specialist earns somewhere between £25,000 and £35,000, and a technical specialist earns somewhere between £35,000 and £45,000. For the guidance service, we anticipate that we will recruit at the level of the assistant technical specialist, and we are looking at an average salary of £30,000. We have gone to some recruitment agencies and asked whether the volumes of people are available and whether that level of salary would be acceptable to people working on the helpline, and two recruitment agencies have answered in the affirmative—they think that our salary levels are right and that we should be able to find the right number of people.
Order. I am very sorry, but you are not going to get an answer. I am afraid that that brings us to the end of the time allotted for the Committee to ask questions. On behalf of the Committee, I thank the witnesses for their evidence.