FOR ADVISERS ONLY
Our summary and thoughts on the FCA’s recent feedback statement 19/5: Effective competition in non-workplace pensions
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Their aim is to reduce the complexity and increase the transparency of charging structures between different pension products. The FCA is seeking feedback and is keen to explore any alternatives to its ideas with interested parties.
In this article, Craig Muir, Senior Business Development Manager at Royal London, summarises the key points of the feedback statement and considers the implications on the future of non-workplace pensions.
The FCA has found that many consumers aren’t engaged in pension decisions or aware of charges they’re paying. This lack of engagement, combined with complex and confusing products and charges, has led to a lack of competitive pressure in the non-workplace pensions market.
There are 12.7 million non-workplace pensions accounts, more than 100 providers or operators (life companies, investment managers, platforms and specialist operators) and around £470 billion assets held or invested1. So similar consumers can pay very different charges and the FCA have stated those paying the highest could be losing tens of thousands from their pension over their working life.
Non-workplace pensions refers to Individual Personal Pensions, Stakeholder pensions, SIPPs, FSAVCs, S32s and RACs. You’ll have noticed decumulation products such as income drawdown aren’t included in this list of “non-workplace pensions”. That’s because they’re covered as part of the Retirement Outcomes Review - you can read the latest rules and guidance in the FCA’s Policy Statement PS19/21.
My gut feel is this is mostly aimed at older higher charged pension products and SIPPs where there can be a raft of different charges, which makes it difficult for consumers to compare on a like for like basis. If you’ve been following the Retirement Outcomes Review, you’ll notice a striking similarity between the new rules and guidance for decumulation products and the proposals for “non-workplace pensions”.
The FCA has outlined a package of potential measures to protect consumers – these could include requiring providers to offer one or more investment solutions, reducing charge complexity and increasing transparency, so that consumers better understand the impact of charges on their savings.
They’re looking for feedback on measures to introduce default funds to protect consumers who do not or cannot engage with their investment decision, and to introduce simpler, more transparent charges.
Let’s look at this in a bit more detail:
The FCA has said they’re considering intervening on charges but are going to wait until they’ve finished their work on assessing value for money across the pension sector and how effective Independent Governance Committees (IGCs) are at achieving this. You’ll remember IGCs currently look at workplace pensions and part of their remit is to ensure they’re value for money. You’ll also know that IGCs are extending their remit to look at drawdown policies to ensure they’re also delivering value for money, so it sounds likely they want to widen their remit to look at non-workplace pensions. This begs the question, could they also decide on a maximum charge for a default fund, say 0.75%, (and hopefully not retrospectively as they did for default funds in workplace pensions)? Well it’s a possibility as they’ve stated they may benchmark costs and charges.
The FCA has suggested introducing a single cost metric including a single pounds and pence figure similar to the forthcoming change to all relevant drawdown disclosures. So consumers can see how much they’re actually paying for their proposition each year. I wouldn’t be surprised if they introduce a cost comparator to see if consumers would be better off switching elsewhere.
Although they haven’t said this, the reason I am is they’re also going to consider ways in which charges can be opened up to external scrutiny and suggested providers should send charges data to an independent body (most likely the FCA themselves) who will collate and publish the data. To me this sounds like the charges data could power a cost comparator for non-workplace pensions similar to the proposed drawdown comparator tool for consumers, which is due to be launched in April 2020.
The final point I want to highlight from the feedback statement is that the FCA have identified cash as one of the top investments for consumers, especially in SIPPs. They also think cash is unlikely to produce great enough returns to meet retirement needs. This is exactly the same issue they found in the Retirement Outcomes Review where they believe a mix of assets would provide a better return. Of course one of the big problems with cash holdings in a SIPP is the SIPP provider may not be passing on any interest, so they retain the interest for themselves but are still making consumers pay for the privilege and the Regulator quite rightly doesn’t like this. Of course, there can be very good reasons for large cash holdings so just make sure you’ve explained why in your client’s file.
The FCA has set out questions in this feedback statement and invites stakeholders' comments by 8 October 2019. They then aim to issue a consultation paper on simplification and disclosure remedies in the first quarter of 2020. It’ll be interesting to see how similar their proposals for non-workplace pensions will be to those from the Retirement Outcomes Review.
Source:https://www.fca.org.uk/publication/feedback/fs19-05.pdf, page 12, 2.9.
Craig Muir
Senior Business Development Manager
Craig joined the Life & Pensions industry straight from university in 1988, putting his degree in Biological Sciences to great use by joining Scottish Widows before moving to Scottish Life, now Royal London. He has held several roles here, including proposition training and development officer. Before finally putting his analyst degree to use when he moved to Marketing in 1997, where he specialised in market research and analysis. Craig became Chairman of LAMRA, an informal association of Life Assurance providers, in 2004 as he worked to improve marketing and market research standards within the Financial Services Industry. Since 2012, Craig has been a Business Development Manager and spends most of his time travelling the UK delivering technical pension presentations predominately to financial advisers.