14 March 2007

James Purnell MP

Minister of State for Pension Reform

Resolution Foundation Conference:

Generic financial advice – from vision to reality

Wednesday, 14th March 2007

[Check against delivery]

I would like to thank Clive and the Resolution Foundation for the opportunity to join you this morning.  It’s great to see momentum on generic advice building across Government, the financial services industry and the voluntary sector – and much of the credit for this must go to the Resolution Foundation for their work over the past year.

In fact, I remember Sue Regan asking me about generic advice at, I think, the launch of our White Paper consultation response, and I remember saying something like, yes, it’s extremely important, which is secret politician speech for “we really must get round to that”.  Or at least it was in my case.

We did know that there would be a role for generic advice in personal accounts.  But we also knew that people probably wouldn’t want just pensions advice – instead, they’d want to talk about their money in general.  I suspect quite a few of you will be familiar with the work of the Retirement Commission in New Zealand. They found that using retirement-specific messages on their website meant that it was unappealing to young people and people who weren’t already saving. They shifted the focus of their information ‘from financial planning for retirement to financial skills for life’ – and produced a user-friendly, financial advice site that has seen widespread use by people of all ages.

So, here we had an issue that cut across many departments.  And an issue that was about prevention and advice, rather than cure and expenditure.  In other words, the typical kind of issue that governments find easy to put in the pending file.

So, I wasn’t just delighted, but genuinely relieved, when Ed mentioned that he was thinking of exploring the feasibility of delivering generic financial advice.  My Department is fully committed to supporting this work, and I am delighted that Otto has agreed to lend us his expertise and lead the study.

Ed and I launched this policy in Hackney recently, talking to parents and carers in their twenties and thirties.  And what was clear was that people do want more help with their money, but that too much of the information they currently get is confusing and complex.  

And in pensions, the result of that is that people are not saving enough.  The FSA have found that, even though four out of five people think that the State Pension won’t be enough to live on in retirement, only two out of five of them have made any additional provision.  And about 40 per cent said that they tend to live for today and let tomorrow take care of itself.  Despite the importance of pensions savings decisions, people are failing to plan ahead adequately for their retirement.

But the problem isn’t just one of information – the reason people find these decisions complicated is that they are.  And behavioural economics has shown that many people have a tendency to disengage from what they perceive to be difficult and complex savings decisions, and therefore do nothing. Too often, inertia means that people never get round to making any provision, even though they know they should.

In all, we estimate that around 7 million people are currently undersaving for their retirement.  

That’s why the Government has decided to move beyond a purely voluntary approach to private saving, and automatically enrol employees into a private pension. This will create a system in which pension saving is the norm – the default option. The new scheme of personal accounts will extend the opportunity to save to those who have traditionally not been served well by the private pensions market, particularly low to moderate earners. And the combination of the 3% employer contribution, low charges in personal accounts and clear state pension entitlement mean that most people will have good incentives to save.

One of the governing principles in designing personal accounts has been that regulated, individual advice will not be required. This is vital if we are to keep charges low and increase the value of saving for members. It’s also important, given that we need to tackle inertia in pension saving, that personal accounts work effectively for the person who does not want to make active decisions and is, for instance, content with the default investment option.

But that doesn’t mean no advice should be available. Far from it, in fact.

Personal accounts will make the decision to save easier for most people – that’s something that I think key commentators have agreed upon – including the PPI in their paper ‘Are personal accounts suitable for all?’. There is also now a broad consensus amongst stakeholders that automatic enrolment is the right way forward.

But, as the PPI point out, personal accounts won’t remove the need for some important individual decisions – and that has implications for the information that will be needed. There will always be some people who will have questions about how saving in a personal account or another pension fits with their wider financial commitments or circumstances – if, for example, they have debt to pay off, or are intending to leave employment for a while. That makes the provision of good quality information crucial.

And there will be others who, having made the decision to remain in the personal accounts scheme, want to consider more detailed savings options – their contribution level, for example, or investment fund choice.  Again, I think generic advice could be extremely helpful in enabling people to make these sorts of decisions.  And I know that the research the Resolution Foundation is publishing today also underlines how important increased access to financial advice could be in increasing pension saving.

The key challenge for us now is to find a way of providing advice that is generic, yet sufficiently personalised to be helpful to the individual. That’s perhaps particularly challenging when it comes to pensions. But there are existing examples of this being successfully achieved – the work of The Pensions Advisory Service, for instance. Through its helpline, The Pensions Advisory Service provides a comprehensive information and advice service to members of the public across a range of pensions issues – and I want to take this opportunity to thank the large number of volunteers from the financial services industry who give their time to this Service.  It’s an excellent example of how to reach all parts of the community, in a low cost and accessible way, with the sort of high quality service that everyone would like to receive but which too often is only available to the better off.

Of course, this is exactly the kind of question that Otto’s feasibility study will be considering – and I look forward to working with him and other stakeholders on his study.  It is all too easy to theorise about different people’s needs – but I hope that the work that is now in progress is moving us towards making generic advice a reality.

So, we’re now moving from the ‘if’ stage to the ‘how’ stage.  And there are some important questions that we will be thinking about over the next few months, as we develop the detail of our reforms. I don’t have the answers, but I would be very interested in your views:

• What should the relationship be between any generic advice service and the Personal Accounts board?
• How would we develop the protocols on which the advice would be based?  Would there need to be an independent element?
• What role would there be for regulation of those protocols?
• Whose role would it be to evaluate and monitor this generic financial advice? Where would that function best sit?
• how could any advice service get the balance right between communicating the uncertainties inherent in pension saving, and the simplicity that most people want in practice?

I know that pension reform is one of the key themes you’ll be discussing later this morning, so perhaps some of these questions will feature in those discussions. I look forward to hearing your views.