Small Pension Funds

Lord Lipsey Excerpts

Tuesday 27th November 2012 Lords Chamber

[Lord Lipsey]

My Lords, first, I declare an interest as the unpaid president of SOLLA, the Society of Later Life Advisers. Because I am unpaid, I can say that this is an admirable organisation which takes on independent financial advisers wishing to specialise in the affairs of the elderly. SOLLA trains and accredits them so that people know they get what they need and not what the adviser wants them to hear.

I thank the noble Baroness, Lady Greengross, for raising this important but neglected subject this evening. Its importance has been highlighted by the excellent briefings that noble Lords have received from a number of outside organisations. It may seem a bit negative but I have to note that there was one briefing that I did not get. I did not get a briefing from the Financial Services Authority, and that seems extraordinarily neglectful because, as the noble Baroness, Lady Greengross, made clear, it is the Financial Services Authority’s retail distribution review that is blamed by many for the advice gap that exists in this area. I shall come back to that later. Surely this House had a right to hear the views of the FSA on this matter, its defence of the RDR and its approach to the problems that have been raised. I do not know whether this is FSA incompetence or FSA contempt for Parliament. Neither would surprise me and I hope that there is a more benign explanation, but it should know that this gap has been noticed.

As some noble Lords know to their cost, I am the House’s statistical geek, and I now want to make a statistical point. The size of the pots involved is often exaggerated due to a statistical quirk. The figure of £28,000 that one sees is the size of the average pot. This “average” is, as most of us learnt at school, the mean average but it is not the appropriate average in this case. There are a few very large pots—£1.5 million for judges and some people in the private sector—and a large number of other pots. However, the correct measure—I say “correct” because there is no doubt about this—is the median pot, where half the pots are bigger and half are smaller, and the median is below £20,000. Therefore, we must not allow the quoted size of the average to mislead us as to the scale of this problem.

Many of these pots are small but we should not conclude from that that they are unimportant. Let us take that median £20,000 pot. With a bit of luck, it might yield an annuity of £1,000 a year. I am afraid that to those of us in this House that may not seem a vast sum. However, let us compare it with the state pension, which is £107 a week, although I know that there is pensioner credit and so on on top of that. An annuity of £1,000 amounts to 20% of the single state pensioner’s income, and it makes the difference between mere penury and getting by.

Perhaps I may take this argument a step further. If somebody is well advised, that may make a difference of 40%—this is not an exaggerated example—so the income they get may go up by £20 or £24 a week or, if they are unlucky, it could be as low as £8 or £16 a week. That makes a huge difference to these people—more so than sums many times that amount would make to better-off people.

In order to get a better annuity, you have to be aware that if, for example, you have diabetes and heart disease you can get a bigger pension from your annuity pot. Indeed, if you smoke, you can get a bigger pension from the pot, but perhaps we will quickly pass over that—not many people will be able to afford to smoke much with this amount of money. However, for that, you need to know that you can do it, yet 75% of people do not know what an annuity is. They have not even reached stage 1, and that is why we need to do something about the advice.

I now turn to a slightly more controversial part of my argument on the advice gap. It is said that people are willing to pay only £35 for advice. The cost of advice from an independent financial adviser is £750, and therefore there is an absolutely unbridgeable gap here. I want to make one or two points. First, £750 is a substantial cost but it will be worth it for many people. I gave the example of a 40% gap in the annuity. If you got an annuity which was 40% better, you would pay for the advice within two years of receiving the pension and then there might be 20 or 30 years in which you would get a much higher pension as a result of the advice that you had taken. Therefore, the cost is not that disproportionate.

Secondly, in my experience, many independent financial advisers are prepared to provide advice even though it is unprofitable for them at the time. They do so partly because, believe it or not, many of them are very socially interested people—that is why they have chosen to specialise in older people—and partly because there may be other business down the line. For example, they may be asked to carry out inheritance tax planning so that the person can do something with their house, and they will therefore get future business from someone whom they helped with their pension and whose trust they won. So we should not think that every transaction has to be profitable. Good advisers can find other ways of benefiting from giving advice.

What worries me, however, is that because of the gap between the cost of advice and what people are willing to pay, we will finish in a wrong place by thinking that it is quite alright to give bad advice because bad advice is necessarily better than no advice. It is not. There are plenty of people who have been flogging payment protection insurance and plenty of advisers who have been getting rich off commission. They are kind of looking at ways in which to give inadequate advice to people on a money-making basis. Although I understand the criticism that is made of the RDR and the end of commission, equally I do not want us to jump off the other side and provide poor advice that is provided for the purposes of people making profits by preying on elderly people. Poor people should not get poor advice; they can afford it less well than anyone else, not more.

In the time available tonight one cannot go into the detail of how a system could be devised that avoids that trap but makes sure that advice is available to those who need it. That includes voluntary organisations of the kind to which the noble Baroness, Lady Hollis, referred. There are ways of doing it, perhaps through simplified technology, and so on. It is not beyond the wit of man, though we have yet to see if it is beyond the wit of the Financial Services Authority.