In the past few days, I have been trying to work out whether I am a glass half full or a half empty kind of person. As a cynical journalist, my instincts tend towards the half empty, but I have been known, on occasion, to feel positive about regulatory and industry initiatives.
So why do I feel so ambivalent about the FCA’s discussion paper, Effective competition in non-workplace pensions (DP18/01)?
This is the regulator’s look at the £400bn market covering individually contracted, defined contribution pension schemes, including stakeholder pensions, personal pensions and Sipps.
In theory, DP18/01 makes many of the right noises. Its stated aim is “to better understand the market for non-workplace pensions: the providers, the consumers and the relationship between them”.
It wants to hear evidence from the industry as to whether competition is working in the marketplace, and if “there is a need to go further to protect consumers”.
I will come back to my own ambivalence about DP18/01 shortly. But first, we should recognise the positives of the FCA’s approach. One of its starting points for the entire exercise is the findings in the Office of Fair Trading study of the DC workplace pensions market in September 2013.
The study found that competition could not be relied upon to deliver value for money to savers for two reasons: firstly, products were complex, making it difficult for both employers and pension plan holders to make good choices; and secondly, employers themselves often lacked the capability or the incentive to assess value for money.
The end result, in the OFT’s view, was that up to £30bn of savings in old and/or high charging contract and bundled-trust schemes may not be value for money, and a further £10bn in smaller trust-based schemes risked delivering poor value for money because of poor trustee engagement and capability.
What the FCA is trying to do is ask very much the same questions for independently taken out pensions, looking for similarities and differences between the non-workplace market it is reviewing and the earlier OFT study.
For example, the regulator points to parallels between the two types of scheme: similar product design, a market dominated by many of the same providers, complex products making it difficult for consumers to engage, and low levels of ongoing engagement with the product.
The FCA also points to a similar approach on charges, including differential fees for customers who no longer contribute to their pensions, as well as complex structures where comparisons between different products are difficult to make.
It highlights that employers make key decisions in workplace schemes, while decisions about non-workplace pensions are made by individual savers, often with advice.
Also, the fact that employers contribute directly to their members’ pension schemes tends to have a disempowering effect on decisions about switching providers.
That said, the implications of the FCA’s comments are telling. It is clear the regulator believes there is a problem with charges levied on some non-workplace pensions, as well as their opaqueness and the fact that savers are being disadvantaged.
The long-term outcome of the FCA’s fact-finding exercise is likely to be that existing charging structures need to be addressed
The focus of DP18/01 in this area is largely on pre-2001 personal pension contracts and, by and large, Sipps and stakeholder schemes, as well as pensions whose charges are based on the stakeholder model. They are, to an extent, absolved from the worst criticisms from the regulator.
But the long-term outcome of the FCA’s fact-finding exercise is likely to be that existing charging structures for many non-workplace pensions are uncompetitive and need to be addressed.
If what I am saying is correct, why do I still believe the glass is half empty in respect of this document?
none of the suggestions in DP18/01 are new. This is a paper that could have been written 10 years ago, and likely would have drawn the same conclusions about non-workplace pension contracts.
The second is the FCA’s gonzo-style approach in requesting more information from the industry. The regulator’s method is to ask for “feedback”, as if it didn’t already have the information to hand. Really? If that is the case, what have its researchers been doing all these years?
The third is the incredible amount of time the FCA plans to take to crack the problem we all know applies to non-workplace pensions. The regulator has given itself until the end of April for responses to a request for factual information. After “considering” industry feedback, the FCA will:
“Construct and send a focused data request to providers of non-workplace pensions […] Later in 2018, we plan to publish a paper which will provide feedback on the themes arising from the responses […] and the data collection.
If the evidence demonstrates the existence of consumer harm, we will subsequently consult on proposals to remedy this.”
If you failed, somehow, to spot a sense of urgency in the entire process, you would be right. As long as issues of this nature are addressed with the glacial speed of DP18/01, my glass will always be half empty.
Nic Cicutti can be contacted at firstname.lastname@example.org. Follow him on twitter