IFAs and the Pension Credit
This BeeLine is a bit unusual in that it is simply an extract of oral evidence taken before the Treasury Committee (of the United Kingdom Parliament) on Tuesday 8th November 2005.† It is taken from an uncorrected transcript of evidence taken in public and reported to the House.† The transcript was placed on the internet on the authority of the Committee and copies have been made available by the Vote Office for the use of Members and others.
Any public use of, or reference to, the contents of the evidence needs to make it clear that neither witnesses nor Members have yet had the opportunity to correct the record.† As such the transcript is not yet an approved formal record of the proceedings.
The Members present at the Committee on 8th November were: Rt Hon John McFall (in the chair); Jim Cousins; Ms Sally Keeble; Susan Kramer; Mr Andrew Love; Kerry McCarthy; Mr Mark Todd; and, Peter Viggers.
The witnesses examined were Sir Callum McCarthy, Chairman, and Mr John Tiner, Chief Executive, of the Financial Services Authority (FSA).
The following extract of the proceedings is interesting in that it deals in part with the question of financial advice and the means-tested pension credit.† Anyone wishing to read the full text can access it by following this link:
Start of extract of transcript:
Q4 Peter Viggers: I want to ask some very simple questions about the basic advice regime. You will have seen statistics produced by Mercer Human Resource Consulting in 2003. They were working on the comparison between the basic pension, on the one hand, and the guaranteed minimum pension, added to which one gets housing benefit and council tax benefit on the other hand. It is the person who has saved for his retirement versus the person who has not saved his retirement. The difference between those two is really quite significant because of the means-tested advantage for the person who has not saved. Mercer calculated in 2003 that it would be necessary for a person to save £180,000 before they would be better off saving. If they cannot save £180,000 and can only save less, they would be better off not saving at all, partly because they have not even had the enjoyment of spending the money. Later a Minister said that the figure was more likely to be £250,000 nowadays. Means testing is making it advantageous for many people not to save. Based on that, how do you justify your response to the Pensions Commission when you said that for most people most of the time it will pay to save? The Mercer Human Resource figure seemed to indicate that for very many people it is not worth saving at all.
Sir Callum McCarthy: I do not claim to have the Mercer figures in any way in the front of my mind when I am answering this. It is clear from, for example, the initial report of the Turner Commission that one of the most significant problems that we have in the United Kingdom is the failure of people to provide properly for their retirement. Steps to make people recognise the need to do that and to think about the realities, which include the means‑tested point that you have identified, I think form an important issue.
Q5 Peter Viggers: The Turner report may well recommend that people should think more about their retirement. The figures I have just put before you, which I think are irrefutable, indicate that people would be very unwise to put aside money for their retirement unless they can be absolutely confident that they can get over this threshold, which has been created by means testing by this Government.
Sir Callum McCarthy: I think it is important for people to recognise the range of influences that is going to affect their retirement, including the points that you have made.
Q6 Peter Viggers: The point I made is clear and extremely disturbing. The first priority should be for people to pay off their borrowings. The Government ought to be creating a system which makes it advantageous to save for their retirement and it has failed to do so. That is the point I am making.
Sir Callum McCarthy: I am not disputing that. I am just trying to explain our role within a much more complex and broad context.
Q7 Chairman: Sir Callum, on that issue, the Pension Commission has identified a number of barriers to greater voluntary contributions to pensions, including the need for more financial capability, good advice and appropriate management charges. On those specific issues, what contribution can you make as an organisation to tackling these barriers?
Sir Callum McCarthy: There are different contributions. If I take financial capability, it is an area where we are much concerned about the mismatch between the demands put on individuals to make individual decisions to do with retirement, health and education and the capability of the individuals to understand the financial products that they are being offered. A great deal of what we are doing is aimed to deal with that: the long-term problem of financial capability - and John has been chairing a committee for the last two years on that and he can describe it; and, second, in terms of clarifying and making more simple and understandable the actual descriptions of financial products from firms. We very much take those as important issues.
Mr Tiner: It was clearly our analysis that the asymmetry that exists within the retail financial services sector, where the power of information is really with the provider and adviser rather than with the customer, means that the market itself in comparison, for example, to the wholesale market in the City of London does not work effectively. I think the public policy responsibility, quite frankly, is to provide more power to the elbow of the customer in this relationship. Improving the financial literacy of people from the moment that they are in school all the way through to the moment they are making provision for retirement and for their families and then deciding how to de-accumulate once they have retired is an absolutely critical priority. We do not have an explicit objective to cover that but we do have an objective to promote public understanding of the financial system. As Sir Callum has said, in the last two years, we have felt that we needed to take much more of a leadership role in the area of financial capability. I can go on now or later to describe some of the things we are doing. The other point is to make the financial jargon at the point of sale much more consumer friendly. The financial industry to a large extent has tied the customer up in knots with jargon and technical terms. Through some new initiatives to produce what we call "key facts" and "key facts quick" documents, quick reviews, there already is in some markets, and there is going to be much more, concise, plain English literature for consumers. That will help them build confidence about their own knowledge. There is a whole range of things going on.
Q8 Chairman: There are two issues on financial capability: one, you need more money; two, you need a buy-in from the Department for Education in terms of the curriculum. Is that correct?
Mr Tiner: Yes. Quite frankly, there are two or three things which are critically necessary. The first is for financial literacy to become either part of the core curriculum or something which is frequently seen in many schools around the country. I think myself that the Department for Education has a public responsibility to provide that and to fund it.
Q9 Chairman: In a recent conversation with Ruth Kelly, she did indicate to me that she would be happy to work along with yourselves, and she has a background in the Treasury and was a member of your committee before she moved on.
Mr Tiner: The Secretary of State was a member of my committee from the beginning. The current Economic Secretary is now a member. That is very welcome news if Ruth Kelly is saying that. I think we also need to see the public sector as a workplace coming to the table. A lot of financial information can be provided through the workplace, both in the private sector and in the public sector. We hope very much that the Government will come to the table there as well.
Q10 Ms Keeble: On the point of pension credit, it is certainly the case that quite a lot of people when they are considering retirement are going to be looking, amongst other things, at pension credit. From what I have seen, most of the advice on pension credit comes from people who are expert in the benefits system and are benefits advisers. People who have substantial savings are going to go more to financial advisers who perhaps might not be expert in the benefits system. We all know that pension credit is quite a complicated benefit. Do you see there is any role for more integrated advice for people approaching retirement so that they can again information on what their income is likely to be based on them as individuals rather than having to ferret around through quite a difficult system to look at what the impact is going to be on their total income, and whether they do or do not go for the pension credit?
Sir Callum McCarthy: One of the questions that was raised at our annual public meeting in July this year was from an independent financial adviser asking, "Am I expected to understand about the benefits system as it impinges upon my clients?", to which the answer was emphatically "yes". If you are giving advice to somebody, which includes advice on matters which are affected by tax or benefits or the interplay between the two, we would expect the IFA to have command of that.
Q11 Ms Keeble: Do you seriously expect independent financial advisers to understand all the ins and outs of the pension credit system?
Sir Callum McCarthy: Not all the ins and outs but enough to give advice, yes. *
End of extract of transcript.
17 November 2005
*††Source:†Uncorrected Transcript Of Oral Evidence, To be published as HC 655-i, House of Commons, Minutes Of Evidence, Taken Before Treasury Committee, Financial Services Authority, Tuesday 8 November 2005.
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