Advice, pensions and the future of retirement planning

Posted: 11th May 2016

“Why is it important to ensure that advice is both available and accessible to every generation of saver?” is a question which was asked of me while sitting on the panel at the ABI’s Long Term Savings event last month.

I know from personal experience that it is crucial to ensure future generations have the right stimulus to seek some form of savings advice or guidance, as well as having the right access to it.

Much of the advice discussion has been focused on the supply side; the need to formulate good value advice propositions, but while I agree with the assertions with regards to supply, I would argue that it’s the demand side that presents the biggest challenge.

Indeed, a key output of the FAMR is that demand for advice is at least as much of an issue as the supply of it. The fact that 58% of UK adults have never sought financial advice (unbiased.co.uk) serves to illustrate this point, with the typical barriers to demand being:

1. Lack of financial capability
2. Lack of trust/confidence in financial services and advice (a recent Warwick Business School report gave advisers a trust score of only 57 out of 100)
3. The perceived low value of advice, with some unwillingness to pay for it as a result

So where does this leave us?

The implications of this lack of demand are playing out in today's retirement market, where firms are presented with a very challenging set of circumstances when trying to ensure that customers achieve good retirement outcomes. Some indicators also suggest that it could get even more difficult when the 40-somethings begin to arrive at retirement.

It’s really these challenging circumstances that make the case for the need for advice at a younger age.

Educating a generation often focused on instant gratification about the importance of planning for the future is vital. 38% of people surveyed by unbiased.co.uk are not making any savings at all for retirement. This includes many people in their 20s and 30s across all demographics who do not understand or appreciate the impact that compound interest, tax relief and investment returns can have on the accumulation of retirement funds.

If financial decisions are accompanied by the advice of a qualified professional from an earlier point in life, a consumer will develop longer-term relationships with advisers and a greater appreciation of the benefits advice provides. In this scenario, the trust/value issue diminishes, and when it comes to the important investments of later life, the consumer already knows that gaining advice serves them well.

We have seen some stimulus from the government in this space, with an extension on tax-free ISA savings and the workplace pension scheme helping encourage consumers to begin long-term saving, but aside from the industry and government’s long-term aspirations, how do individual firms make inroads in this space by prompting people to seek advice now? Can firms’ culture break down these barriers?

How to bridge trust and advice gaps

Consumers of different ages may be at the same point in their financial lifecycle (a 25 and 35 year old buying their first home, for example), and, inversely, consumers of similar ages may be in very different life stages (for example, a 25 year old buying their first home versus a 25 year old just getting their career underway).

This exemplifies the need to take a holistic approach to retirement advice, and to do this, I’d suggest looking at the lifecycle of consumers. Can your firm look at consumers differently when it comes to their ‘financial services journey’?

Because the arc of one consumer’s financial services journey can be different to the next consumer’s, the challenge for firms is ensuring their advice propositions are proportional and take account of consumers’ individual circumstances. Firms should be looking at further developing models where an individual’s circumstances prompt the use of certain advice types and delivery methods.

To this end, the FCA’s Consumer Spotlight offers definitions of different categories of consumer and their typical situation. Although there will be no substitute for establishing and reacting to each individual’s circumstances, it is certainly possible to use these customer personas in combination with simplified advice definitions (more clarity over these is a key recommendation of the Financial Advice Market Review) and various delivery methods to formulate a proportional advice offering.

For example, the FCA’s definition of the ‘starting out’ consumer category reads:

“A younger group overall, with most under 45 and more than half under 35. Confident and optimistic as a group, the majority are single with no children. Almost all rent their home, and income is slightly lower than average. Three fifths are in work or studying, and there is a high level of education. They are technologically advanced, conducting most of their financial affairs online.”

Here we see a group primed for direct-to-consumer advice and/or guidance. Which channels can your firm use to engage these consumers in retirement planning? Email correspondence; online chat facilities; offers and information delivered through internet banking apps? This group are far more able (and likely) to engage with these methods, and so your firm can establish its message for this category of consumer and deliver it where it knows it will be seen.

This sort of thinking is possible across all of the customer categories. See also the definitions of ‘stretched and resourceful’ and ‘busy achievers’ – these categories of consumers are likely to be spending a lot of time fostering their careers. Can your firm look to collaborate with workplaces to offer more information and support on the benefits of financial advice and/or planning for retirement?

Again, this sort of industry development was recommended by the FAMR, and so firms’ proactive engagement in this area may lend them a competitive edge, provide brand exposure, create customer advocacy and, most importantly, begin to bridge the trust gaps that are widely recognised to exist between consumers and financial services firms.

Final thoughts for firms

In order to move further towards an engaged, financially independent retiring population, there is no doubt that tackling the demand side of advice is of pinnacle importance. Consumers will always be left wanting if the demand for advice is not there.

That said, however, the fact is that demand will not arise naturally. It will take the contribution of those within the industry to fully re-engage people in retirement saving, and it’s through recognising and reacting to the changing experience of financial services consumers that this can be achieved. We have to start looking at what we as an industry do for consumers within the early stages of their ‘financial services journey’, rather than dealing with the consequences of a lack of knowledge and a lack of prior planning at the end.