Philosophy, Pubs and why pension freedom raises more questions than answers.

Across the land, in offices, conference centers and probably the odd pub  there is plenty of debate in the professional advice community on the impact of pension freedoms.

Although you might philosophically agree with pension freedoms (and for one I do) there’s no denying that currently there’s a gap between the philosophical “ideal world” and how the reforms will work in a reality which is as least as wide as the grand canyon.

I use the phrase ‘as least as wide’ completely intentionally as the reality of the challenges of this changing market for everyone involved is clear….

In truth, none of us really know how the demand for guidance, or advice, or increased information will change.

That’s why many of these debates are important to have but speculative in nature.

The reality is we’re not even close to seeing the real impact of pension freedoms yet.

However there’s no denying that all parties including TPAS, Citizens advice, charities like age UK and the advisory community all have a challenge on their hands.. We just don’t know the size, scope and scale of that challenge at this stage of the game.

This morning I was involved in one of these debates, together with Michelle Cracknell, Jane Vass from Age UK and Mick McAteer.

The particular slant of our debate was how pension holders with relatively smaller pots handle the reforms.

There’s no doubt that Pension Wise will play a huge part in helping smaller pots understand their options. I also believe that other groups with huge reach (including Age UK) will play a part in helping those affected understand what the reforms mean to them.

However where does that leave the role of advisers?

I can’t speak for you, but the current business model for my advisory practice doesn’t accommodate dealing with investors with small pots particular easily. There’s a commercial reality which means that to be profitable we need to be sensible in terms of the clients we can work with and those that can’t.

This is for a bunch of reasons including regulatory costs, the risks associated (which during our debate Mick made a particularly good case of highlighting many of them) as well as the human time it takes to help a client not only navigate the world of regulated products but also clarify and identify the connection they make between their money and their lives means that there are clear commercial restrictions on engaging with certain clients.

For the clients with smaller pots Pension Wise will help but what happens if at the end of the ‘guidance’ conversation when an individual with a smaller pot still wants advice? If it’s not commercially feasible for the adviser to take on the client, and even if they want advice, will they be able to get it?

Being an eternal optimist I hope we see innovations in the marketplace which will potentially provide solutions to this issue. However to be clear I believe these innovations need to be in the way we explain, communicate and guide people to make the right decisions as opposed to being in the area of new potentially complex financial ‘products’ which only long term erode the confidence of individuals who want to benefit from these reforms.

How we communicate and educate the changes for me remains the more immediate and pertinent issue.

Mick disagreed with this approach highlighting the point that the changes have the additional risk of seeing more complex financial products eroding the reputation of financial services longer term. He highlighted the risk that these changes increase distribution costs and therefore make the detrimental impact of these changes inevitable.

Whilst I’m prepared to accept this risk is a possibility surely it’s worth taking a look at how to decrease inefficiencies, using scalable technology and ensuring that a service can be delivered to those who are likely to need it the most….those with smaller pension pots.

Not more complex financial products designed to take advantage of the changes but services designed to help people inform, educate and make better decisions.

Maybe a commercial ‘advice’ service for smaller pension pots won’t be needed as Pension Wise will fully fill the gap. Maybe Mick’s right and the risks of pension freedoms hugely outweigh the potential benefits.

Maybe we won’t see the expected demand but maybe we’ll see a surge of people rushing to take their cash out. Maybe innovation will occur in this market and maybe because of the perceived risks of innovation in this market we won’t see this at all.

However one things for sure….

At this stage of the pension reforms there’s a lot more questions than answers!

What do you think?