AEGON chief executive Otto Thoresen has recently published his recommendations for reforming the UK's system of financial education and advice. He recommends a national money guidance service available to all, providing free, impartial information
and advice on budgeting, saving, debt management, borrowing, insurance and retirement planning.
This is a laudable aim. Thoresen is certainly correct that learning to manage money properly is as important as eating sensibly. He has recommended a pilot project, costing more than £10m, to test out his proposals and establish money guidance centres to cover all aspects of generic financial advice.
These might be seen as a National Wealth Service to help with everyone's financial health, just as our National Health Service looks after physical health.
But can such 'money guidance' work with the Government's new personal pension accounts? I believe there are serious dangers with generic advice when applied to pension saving for the mass market, which could trigger a new wave of scandals.
It is disappointing that Thoresen has not considered carefully enough the important differences between generic advice for retirement products and other types of financial decisions. Advice on pensions needs much more careful construction than generic advice for other areas such as debt or insurance products.
For example, would such advice really encourage people to opt out of personal accounts when they should? The system will be funded jointly by the Government and the financial services industry, but both bodies have strong short-term vested interests in ensuring people actually do contribute to pensions and personal accounts.
The Government already has a dreadful record in trying to encourage private pension savings without explaining the risks properly.
After the personal pensions mis-selling scandal in the late 1990s and early 2000s, the Government encouraged workers to contribute to their employers' final salary pension schemes and assured the public that their money would be safe.
In reality, the pensions were not as safe as employees were told and, despite knowing this, the Government failed to warn of the risks while continuing to encourage people to contribute. This resulted, a few years later, in 150,000 people discovering that they had lost most or all of the pensions their contributions were supposed to have provided. It has taken nearly six years for the Government to finally agree to offer a decent settlement to those affected.
During that time, many people died, some committed suicide and lives were ruined because workers saved money, in good faith, in a pension that turned out to be worthless.
The Thoresen national money guidance service could end up making similar mistakes if people are not warned that state pension credit could take away much or all of their personal account pension. Then, in future, they may feel forced to seek redress from the Government because it knew people could be wasting their money, but failed to ensure they were properly warned.
Pension providers and politicians may well judge the success of Thoresen's generic advice service by how much money is contributed or how many people are contributing to personal accounts. However, the real measure of success will be whether people receive decent pensions from them.
Since the state pension system relies on mass means-testing of pensioners as a supposedly long-term solution to state pension affordability, pensions are not a suitable investment for many people. It is certainly not safe to assume pension credit will be abandoned, since Government forecasts indicate it will still be in place in 2050. How will generic advice deal with our ludicrously complex pensions system? It seems implausible that generic advice can truly explain the long-term risks in contributing to personal accounts without putting most of the target group off the idea!
Probably the only conclusion that honest generic advice would lead to is that large numbers of people should not contribute to a pension. This inclu des the young, anyone in debt, people who have not yet bought a home, those who may need some rainy-day savings or indeed people in their 50s and 60s with no other savings and little time left before retirement.
Impartial independent financial advice would suggest all these groups should not contribute to a pension. They might consider Isas but not personal accounts, because they are at severe risk of pension credit taking away at least 40% of any pension they receive.
It is vital that the Government wakes up to these issues. The state pension is so inadequate that all workers will need private sources of income in later life. However, the majority do not have the necessary skills to prepare themselves properly.
Another danger are proposals to extend the Savings Gateway pilot scheme to help lower earners to save, providing equal or better savings incentives for lower earners than the tax relief available on pension contributions. So this Savings Gateway could potentially be a much better option for lower earners than pension contributions. Again, how will generic advice cope with this and, if it does, will it not simply direct such people away from personal accounts?
On a more positive note, however, Thoresen's pilot projects could be very helpful in testing out generic advice for annuities. This should improve retirement income prospects for soon-to-be pensioners immediately by preventing so many people ending up with the wrong annuity and a poor rate.
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Ros Altmann is a leading pensions expert and governor of the London School of Economics and the Pensions Policy Institute