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Can new regulatory deal solve pension deadlock?

Michael Klimes explores the policy direction unveiled in the new joint strategy published last week

In a joint strategy, the two industry watchdogs identify key issues and priorities for change

Some commentators have long argued that the complexity of the UK’s pensions system is partially explained by the fact that there are two watchdogs governing different parts of the sector.

Earlier in October, a deal was struck to try to solve this as the FCA and The Pensions Regulator launched their joint strategy, heralding closer collaboration between the pair.

An introduction from TPR chief executive Lesley Titcomb and FCA chief executive Andrew Bailey stated that the joint strategy “marks a milestone in the evolution of both regulators”.

It said the world of pensions was complicated and changing fast, and pointed out there was only so much regulators could do on their own, with action required from other stakeholders. Government agencies, employers and advisers must play their part to ensure a good retirement outcome for the majority of savers.

Nonetheless, the joint strategy document said the watchdogs would use a broader range of interventions to drive up value for money for savers, and identified two priority areas for the future.

The first would be a strategic review of the entire consumer pensions journey, taking an in-depth look at what tools are needed to enable people to make considered decisions about their pensions.

The second would see the watchdogs use their powers to drive value for money for members of pension schemes, including the setting and enforcement of clear standards and principles where relevant.

In numbers: The regulators’ big pension themes

Transfers out of DB schemes: FCA data suggests that the number of transfers from DB schemes into contract-based DC schemes has increased nearly threefold in the past year.

The rush to drawdown: Sales of annuities are continuing to decline, from over 420,000 in 2012 to around 71,000 in 2017, and drawdown has become the most popular retirement income product.

A population living longer: Figures from the Office for National Statistics show that in 1989 the average 65-year-old woman could expect to live to around 84, and the average 65-year-old man to around 80. While recent figures show that life expectancy has plateaued, by 2039 the equivalent figures are expected to be 91 and 89 respectively.

The risks to pots: The average DC pension pot at retirement was £50,000 in 2017, which strongly suggests a significant risk that many individuals’ pension savings will be insufficient to meet their needs.

Source: FCA and TPR joint pension strategy document

Key threats to savers
The strategy also identified other key issues which contributed to the prospect of people not having adequate income, or the income they expect, in retirement. These are worth exploring in some detail as they reveal the thinking behind the shift in policy that is materialising.

The regulators listed four main threats to their strategy, with the first two being people struggling to maximise their pension savings and money not being managed in line with savers’ needs.

Concrete examples included consumers who missed out on the savings they were entitled to under auto-enrolment, and members who received lower levels of retirement income due to under-funding of defined benefit schemes.

The third and fourth threats were pensions not being well looked after and people not being enabled to make good decisions. Here, there could be money lost through governance or administration errors and harm caused by consumers’ inability to access advice.

The strategy went on to state that the regulators would focus their interventions on four areas to try to improve retirement outcomes for consumers. These included boosting access to better retirement income products, so people could increase their financial provision for later life.

The regulators also wanted to ensure pensions were well-funded and invested appropriately, alongside better governance and access to helpful information.

To measure the success of the strategy, the FCA and TPR proposed to review it and the associated action plan in three years’ time.

Aegon pensions director Steve Cameron says the joint review of the consumer pensions journey should allow the industry to take a step back and understand what drives informed decision-making among consumers.

Many industry initiatives and regulatory interventions are already making improvements at particular points in the consumer’s journey, he says, for example when moving into retirement, but there could be disconnects in approaches to communication.

Quilter pensions expert Ian Browne says the agreement of a joint strategy is a stepping stone in the right direction but needs to be followed by action at the legislative level.

Browne argues that the next step is for the Department for Work and Pensions and the Treasury to have a joint pension strategy as well, and for all pension legislative changes, including tax changes, to be set via joint consultation. That would meet the desire for pension policy to be handled independently of government, in a similar way to how the Bank of England sets interest rates.

It would address challenges raised by the FCA and TPR around certain initiatives such as the pensions dashboard and the Single Financial Guidance Body, which require them to work with the government.

Royal London director of policy and former pensions minister Steve Webb says greater collaboration should help all parties to see the bigger picture and produce better outcomes in the long term.

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