Lords claim RDR reforms will widen 'advice gap'

Peers said in a debate last night that the retail distribution review (RDR) reforms, combined with high pension charges, would hurt savers with small pension pots.

The RDR reforms will abolish the payment of commission to financial advisers and require them to hold higher qualifications from the end of this year.

Cross-bench peer Sally Greengross, who led the debate, said the RDR would lead to those on a modest income being priced out of the advice market.

‘There is a big chance that [the poorest] are exactly the set of people who will receive no advice at all, as costs are made transparent and IFAs follow more high net worth clients,’ she said.

‘We must narrow the advice gap. Much more should be done to ensure consumer information is delivered but that must be from a consumer, rather than a compliance, perspective.’

She added that a fragmented government savings policy, split between the work of the Treasury, the Department for Work and Pensions and the FSA, was contributing towards the problem.

Tory peer John Patten added that it was possible for cost-effective investment and advice options to be made available to savers with small pots. ‘We could use the buying power that a million people would have to negotiate for good advice or a better deal when they invest,’ he said.

‘There may be market driven options. They have £2 billion to invest - the market could come up with a process to get a better deal for pensioners.’ Government whip Tina Stowell said the Department for Work and Pensions would consider his idea.

Patten also harshly criticised charges taken from pension pots. ‘These charges have just abolished any chance of getting these rates. People talk about the magic of compound interest but [there is a] tyranny of high charges.’

Labour peer Patricia Hollis added that self-interest among pension providers was also hurting the drive to create a savings culture.

‘I argued for small pots to be transferred to Nest [the National Employment Savings Trust] but this was batted away by the self-interested howls of the industry who would lose money under management,’ she said.  ‘In much the same way they have batted away any early access to a slice of pension savings that would also help transform savings culture.’

‘Many will be left with a portfolio of small pots which will be inaccessible to them at retirement. Those pots have gone AWOL, stolen by the structure of the pension industry we have helped to create.’

Labour peer Lord Lipsey added that the Financial Services Authority had failed to engage politicians in its efforts to reform financial services with the RDR.

‘I did not get a briefing from the FSA - this is extremely neglectful. It’s the FSA’s RDR that’s created the advice gap. Surely those here have a right to hear from the FSA. I don’t know whether this is FSA incompetence or FSA contempt of Parliament.’

Lipsey, who is the president of the Society of Later Life Advisers, said it would be wrong to assume advisers would not write unprofitable business at retirement as ‘winning the trust’ of a pensioner could mean getting other work, such as on inheritance tax issues, later on.

For a more positive explanation of the RDR reforms watch this video, 'Why the "retail distribution review" is good for you'.

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