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Keep it simple to cut risk, says FSA

The FSA has told the Government that the simpler it makes personal pension accounts the less risk of consumer detriment and the less need for the regulator’s involvement.

It says a simple system could mean that many, if not all, the risks of unsuitability could be mitigated through information, education and possibly stakeholder-style decision trees and generic advice although it admits some people would still make the wrong decision.

Specifically addressing the risks of the branded provider model, the FSA says the risk-iest model is one close to the present system while a standardised product and fund offering is less risky.

It argues that, in a complex system, competitive pressures can provide incentives for firms to compete on product offering which may confuse the public.

It says with providers competing for market share, risks may emerge where the schemes are marketed to self-employed and economically inactive people.

The regulator warns that providers could target consumers with bigger pots to persuade them to transfer either into another personal account or different scheme which risks detriment. It also warns that firms may rely on cross-selling to make money because the charges are so low and this also carries risks.

It says the accounts may be suitable for the same people as stakeholder and personal pensions so consideration will have to be given on how to regulate sales before and after the introduction of personal accounts but it gives few details.

The FSA considers that clarity is needed over whether the accounts would be deemed personal or occupational pensions.

Some unsuitable groups are easy to identify, says the response, such as the terminally ill and people with debt repayments higher than the amount that could be saved.

It says suitability will also depend on means-tested benefits, particularly where older people with no savings do not have the time to build a pot that is sufficient to take them beyond means-testing before retirement.

The FSA says that the Government wants only a small number of people opting out of the scheme as a matter of social policy so it may decide the benefits outweigh the cost of some people making making “sub-optimal” choices.

Some scheme members may fail to save enough to meet their needs or save too much when they would be better off in arrangements more flexible than a pension, says the regulator.

But, using stakeholder as an example, it says consumers are best placed to know what contributions they can afford and says “it sees no material reason why this success cannot be replicated”.

The FSA says there is a risk that Government endorsement of the scheme will imply a guarantee, that investors may choose the wrong fund for their situation and that they may be unaware of inflation and annuity risks but it says these risks can be mitigated through improved financial capability, information and generic advice.

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