The Consumer Panel also argued that the outcome of a Pension Wise sesson "may well be meaningless" if the guidance does not take into account all of a consumer's assets and liabilities, in particular equity in property. The panel said it would increase the likelihood that people will just focus on their choice of retirement product, and not the impact this will have on their overall retirement income.
In its inquiry into pension freedom guidance and advice, the Consumer Panel said that a holistic guidance service that takes into account all different aspects of the consumer’s circumstances is crucial to ensure they benefit from Pension Wise.
It also said it remained concerned about "inconsistencies in service standards between delivery partners, and the low numbers of consumers using Pension Wise".
The Consumer Panel provides advice and challenge to the Financial Conduct Authority, and is calling for it to take urgent action to ensure that intermediaries who perform non-advised sales adhere to a strict set of standards.
It expanded:
"The Panel is concerned that some pension providers may be respecting the letter but not the spirit of the rules requiring them to signpost people to the official Pension Wise guidance. There are indications that consumers who contact their providers are encouraged to use the firm’s ‘in-house’ guidance providers, who are obviously not independent and impartial.
"The Panel does not believe that providers themselves should play an active role in delivering non-regulated guidance related to pensions. The conflicts of interest inherent in this approach cannot be overcome as the firm, from a commercial standpoint, will likely seek to maximise its profits from the customer without necessarily paying due regard to the latter’s needs and circumstances. It is crucial that consumers can access independent guidance to ensure they can make an informed choice that is in their best interest."
However it has also asked the FCA to be more prescriptive about minimum qualifications and the number of years of relevant experience that Pension Wise counsellors should have.
The Panel said:
"We believe that the level of service required by consumers in this area can only be delivered by confident, competent, experienced professionals who do not have to rely on a script. They need to be as qualified and experienced as regulated financial advisers."
The inquiry notes that just 18,000 people used Pension Wise from April to July 2015, compared to the 60,000 UK residents who made use of the pension freedoms between April and June, meaning that the remainder either cashed in without guidance, or only discussed options with their pension provider.
As a consequence, and due to low interest rates, consumers are becoming more vulnerable to fraud in their search for yield. For example, City of London figures showed that consumer losses to pension scams increased by 235% in May compared to April this year, when the reforms first entered into force.
The Panel also expressed serious concerns about the feasibility of the government's commital to creating a market for secondary annuities by spring 2017.
The inquiry explained:
"Such a market would carry considerable risk of consumer detriment, as people may forfeit their guarantee of a lifelong income without being able to assess whether they are receiving value for money for their annuity. The provision of independent advice to warn consumers of the potential pitfalls will be vital.
"However, the Panel believes there is currently no market solution to the question of how adequate advice and support can be provided to consumers, irrespective of income level, to help them assess whether they are being offered a fair price for relinquishing the right to such a valuable asset. Regulated financial advice may be available, but at a high price. In most cases any reputable financial adviser would recommend that the annuitant should not sell."
Finally, the Panel showed its support for the extension of the MiFID II “appropriateness” test to pensions. The FCA is considering extending the “appropriateness” test to pensions because it considers “pensions liberalisation could give rise to new risks of inappropriate sales of insurance-based investments to consumers”.
It concluded:
"It does not offer the protection to consumers that would result from the non-advice Code of Conduct described above, but it would require firms, when making a non-advised sale of a pension product, to ask their client to provide information regarding their knowledge and experience of the specific type of product offered or demanded.
"Separately, the Panel would also encourage the Government to look at raising standards for non-advised sales as part of its Financial Advice Market Review."
