Competition between pension providers is moving further up the FCA’s agenda as the industry prepares for further enquiries into non-workplace schemes.
An ambitious discussion paper published in February sets out the regulator’s desire to know whether competition is working well in a sector it estimates has around £400bn in assets under management.
This is more than double the £168bn in contract-based defined contribution workplace pension schemes.
A key theme of the paper is understanding how competitive non-workplace pensions are compared to workplace pensions. While advisers think the focus of the paper on fees and charges in legacy products is correct they are also watchful about what the FCA eventually does. They worry it could look at this diverse sector too simplistically and apply misguided solutions.
For instance the paper cites research from Mintel that argues the Sipp market is diverging into two separate areas: lower-cost and lower-value platform Sipps, and full-range bespoke Sipps. The streamlined Sipp offers investors access to a range of
standard investments, while the full-range or bespoke Sipp allows the widest choice of investments such as derivatives.
Fidelity International head of pensions product Carolyn Jones argues these are two different products that the FCA needs to recognise in its work. She says: “The FCA has put many products under the label of ‘non-workplace pensions’ which are actually very different. Although the paper talks about the Sipp market there is a contrast between a Sipp which is an extension of an individual personal pension and a Sipp with more esoteric investments.”
Section four of the paper talks about understanding the level of annual management charges on non-workplace pension funds compared to workplace funds.
Jones explains the ongoing charge figure is frequently used for a more accurate cost of fund ownership as it encompasses the fund’s professional fees, management fees, audit fees and custody fees.
Jones adds: “If the FCA want to compare a fund used in workplace to the same fund used in non-workplace in terms of charges, then they need to ensure that they are comparing like with like and look at the overall cost of ownership, not just the annual management charge.”
Regulation tends to look for a ‘one size fits all’ solution. This approach may be less problematic with workplace pensions, but it would be a disaster within the non-workplace pension market; there’s simply far more diversity. That said there are things the regulator could do to improve consumer outcomes, and a number of these are being addressed. These include things like competition and pricing, though they should resist any urge to apply a blanket price cap across the entire range of pension products.
The discussion paper talks about complexity of pension products but the focus appears to be on charges and how these are presented, rather than on the amount of unintelligible bumf consumers must wade through simply to open and invest in a pension. This is not limited to non-workplace pensions, but without auto-enrolment the consumer must make a deliberate effort and the discussion paper doesn’t really appear to address this. The focus is on charges, choice and funds rather than improving accessibility and understanding.
Dennis Hall is Managing director of Yellowtail Financial Planning
The fact the FCA is looking at so many products with variable charging structures has policy implications for how it supervises the market.
She continues: “Take the example of a default fund in contract-based and trust-based workplace pensions. Here 95 per cent of people could be in the default fund, and so the economies of scale ensure the funds can be managed under the 0.75 per cent charge cap.
“How do you translate the charge into the non-workplace pensions world? When individuals choose their own funds the concept of a default cap falls away as charging structures are different.”
A ‘blunt sword’
Signpost Financial Planning director agrees and says: “The problem with charge caps is that it is a blunt sword, and although you achieve the objective of lowering charges overall, the question is, at what price? It would be bad news for the advice industry and clients generally if this was brought in across the board.”
The FCA’s paper does seem to grasp the point about one size fits all solutions not being sensitive to nuanced markets when it says: “We aim to understand whether competition is working well in the market for non-workplace pensions and whether or not there is a need to go further to protect consumers.”
Nonetheless Primetime Retirement managing director of sales and marketing Russell Warwick points out that the sheer size of the non-workplace market deserves regulatory scrutiny.
He says: “Post-RDR the regulations became clearer, but pre-RDR there were many policies that have become zombie funds. They have charging structures and investment strategies that are no longer fit for purpose.
“Most policies historically had a default fund but who are those policies managed by now: the adviser, provider or client?
“It is not clear, and so there are loads of customers in these policies who probably need to track them down and look at them. Here they need an adviser.”
Peter Stewart Associates director Mike Brown echoes Warwick’s point about clients needing advisers to help them monitor policies taken out years ago. Brown saw a recent client who had a collection of pensions that he had been paying a considerable sum into for many years. The provider was one of the direct sales companies prevalent in the 1980s, and the plans had not been reviewed in a long time.
Brown says: “His contributions in the past 12 months had been invested, but only after approximately 10 per cent of those contributions over the year had been absorbed in charges, and upon initial scrutiny the performance of the funds into which he had been invested was underwhelming, to say the least.”
While Brown believes apathy is the reason why compulsory pensions in the workplace are the correct way forward for new savers, similar heavy-handedness would not address issues from the past in the non-workplace world.
He adds: “Personal pensions, Section 32s, Sipps, freestanding additional voluntary contributions and s226 policies all have their benefits and their disadvantages. However to try to legislate change to these would be very dangerous, and would undoubtedly introduce yet further extra complexity and confusion.”
Nucleus product technical manager Rachel Vahey thinks the FCA’s paper is a solid first step into a complex area of pensions. She says: “This area of pensions is like the gig economy, and life is full of nuances here. The FCA is halfway there with this solid paper and I hope it carries on in that vein.”
The FCA is seeking feedback by 27 April 2018, will consider responses and will then look to collect further data to better understand any problems it identifies.
Phil Deeks: Co-operation needed over pension strategies
There are many similarities between workplace and non-workplace pensions in terms of complexity and barriers to transfer (perceived or otherwise). However, it’s arguably more important for
the FCA to recognise the differences to ensure proportionate and appropriate remedies.
Auto-enrolment and non-workplace pensions have different regulators. A joint pension strategy is a good start but there needs to be greater collaboration and interaction.
Regulatory change won’t necessarily come quickly, but solutions are likely to be relatively binary between legacy customers and new customers (typically
self-employed) seeking to make regular contributions into their retirement provision.
The industry is not seeing many new advised cases for regular contributions into pensions in the non-workplace space, so we may see different remedies.
It’s incumbent upon the industry to flag these differences so that there’s no misunderstanding about how these types of pension are different. Generally:
- A higher proportion of legacy non-workplace pensions would have been advised and have a higher likelihood of suitability. Post-RDR, customers are less able to access advice to gain this comfort, which is an ongoing challenge.
- More proactive non-workplace pension members are more likely to have conducted due diligence over their pension selection, or have delegated this responsibility to an adviser, leading to higher overall engagement.
- Legacy non-workplace contracts will be more expensive.
However, assuming that this could mean a charge cap is a remedy misses some of the nuances of a non-workplace pensions. The contract may be more complex and provide more options by design and therefore will need to be more expensive. That’s not to say that the market isn’t without fault, but industry engagement is essential to ensuring that any potential remedies are fit for purpose.
Phil Deeks is technical director at TCC