The regulator must focus on removing outdated rules and making charges and illustrations clearer
An FCA discussion paper released earlier this month has asked for views on non-workplace pensions.
Covering a mix of products, including Sipps, stakeholder and individual pensions, as well as older contracts, such as s32 buyouts and retirement annuities, it focuses on three main areas:
- Whether customers get value for money;
- Whether firms are putting customers at the heart of their businesses; and
- Whether there is suitable competition in this market.
While there has been much focus on workplace pensions over the last few years as a result of auto-enrolment, there is still around £400bn of assets under management in non-workplace pensions – more than double that invested in contract-based workplace schemes.
Stakeholder pension rules
One area of focus is on stakeholder charge caps, which the FCA suggests may not be relevant. That is certainly true. The industry has moved a long way in the last 17 years and a cap of 1.5 per cent in the first 10 years, dropping to 1 per cent thereafter is an irrelevance today.
The FCA says it is minded to remove the requirement that advisers need to take account of stakeholders when selling personal pensions (the old RU64 rule, which was carried forward into Cobs rules). Again, I do not see this has any relevance in the current market.
Rather than tinker with the stakeholder pension rules and how they fit into today’s market, the more appropriate, although radical, step would be to entirely remove them.
I appreciate this may not be straightforward and will need legislative change but removing an outdated concept which has no relevance or benefit to today’s consumers would be very helpful in simplifying the pension rules.
Hopefully, providers would also play their part by ensuring stakeholder charges are in line with other current products, if they have not already done so.
Unsurprisingly, charges are also a focus of the paper. But this focus is mostly in terms of older contracts, with the FCA considering the extent to which charges on pre-2001 contracts remain at higher levels than current ones.
It is also essential the FCA considers how transparent these costs are to customers, and how easy it is for them to switch to other providers. That said, we need to remember that costs are only one part of the equation.
Many s32 customers will be staying put due to the significantly higher tax-free cash available at retirement, and that may trump higher charges.
A solution would be for HM Revenue & Customs to simplify the ridiculous rules surrounding protection of tax-free cash on transfer. Allowing people to transfer to another, cheaper contract and retain their higher tax-free cash, without the requirement for a “buddy transfer”, would be helpful to many.
Related to charges are illustrations and the extent to which they are understood by customers. Illustrations are a pet bugbear of mine; they can be horribly complicated and very unhelpful. We need revised regulations which help reduce the amount of information and the complexity of some of the concepts, such as reduction in yield.
If we want customers to understand charges, they should be shown clearly in pounds and pence, not as a reduction to a growth rate or fund value.
The take up of advice is also highlighted in the paper. The FCA points out that, historically, the vast majority of non-workplace pensions were sold with regulated advice but that has declined over the last five to 10 years.
During the last two years, only 40 per cent of new sales were advised. This is key for a couple of reasons. The FCA has found, firstly, that over 93 per cent of advice was suitable, helping clients get the best outcome and, secondly, that competition is not working as well for those who do not seek advice.
So not only do non-advised consumers not receive the benefit of expert help but they have an inferior number of options available.
The FCA will conduct research to explore the extent to which consumers who buy a non-workplace pension scheme without advice shop around before doing so. But it feels like we have been round this loop many times before.
Perhaps there needs to be less focus on research and more on working out ways in which we can help more shop around for the best solution. Or, better still, take regulated advice.
There is a great deal going on in the regulatory environment at the moment. Given some of the other areas, I am not sure non-workplace pensions would be at the top of my list for scrutiny. Having said that, there are some key areas where the rules can be greatly simplified and hopefully progress can be made on some of these.
Andrew Tully is pensions technical director at Retirement Advantage