Are we in the middle of yet another pension misselling scandal? I am not talking about the growth in defined benefit to defined contribution transfers, which of course contains a lot of misselling and much of it is certainly scandalous.
I am talking about the misselling that was laid bare, or at least stripped to its underpants, by the FCA in its Retirement Outcomes Review final report.
It will not, of course, be anything like ‘final’. There are consultations to be done, consultations about consultations, and some of those will be followed by a period of review before further consultations. Such is the nature of the watchdog and, it says, the legal constraints that, ahem, dog its powers.
One hope for 2015 pension freedoms was that firms would develop competitive products for the now officially named decumulation phase. However the report found “we have not seen significant product innovation for mass-market consumers”.
Its findings show why: there is no need. The industry has simply extended drawdown to the mass market. It found that 94 per cent of consumers who accessed their pots without taking advice accepted the drawdown option offered by their pension provider. Even among consumers who took advice, 35 per cent stuck with their provider.
Those figures are far worse than the Association of British Insurers reported in 2013. About half stuck with their pension provider’s annuity even though nearly two-thirds looked at other providers. The failure of that market was the main excuse to introduce pension freedoms in the first place. But compared with the current drawdown market it was a model of competition.
The Retirement Outcomes Review report also exposed why the industry loves drawdown; because it is so profitable – not just at the point of sale as annuities were, but year after year. Whether customers stick with their own provider or find another among the “hard to compare” products, they may well end up with a drawdown product that has average charges of as much as 1.6 per cent a year. That could be made up of some 44 separate charges drawdown products can make in a “complex charging structure” which “consumers may struggle” to assess. Many charges apply when customers choose another provider. No wonder there is “weak competitive pressure”.
The FCA also found that the level of charges was not correlated with the performance of the drawdown product: “the evidence does not show a clear relationship between charges and performance – it is not clear that you get better returns in exchange for higher fees”.
Like many financial products, you do not get what you pay for. Which is why when it comes to investments the only sensible advice is go for the cheapest. If 94 per cent never exercise choice, they are stuck with charges that may be excessive and performance that may be poor.
Despite this clear finding, the FCA reserves its longest and most tortuous process to consider whether a cap on these charges might be a good idea. It will not impose a cap on drawdown of 0.75 per cent, which was recommended by the parliamentary Work and Pensions committee to mirror the cap during accumulation. Instead, it is asking if it should consult on mandating that everyone will be offered a choice of three typical investment pathways – some of which will include drawdown.n.
If the question is answered yes then it will consult on what to do later this year, including simplifying charges. Then, after the usual papers have been published and an implementation period passed, firms will be given a further year to see if they challenge themselves on the fees charged. There will then be a review of that market data, and then the usual formal procedures after that. Any change before 2022 seems highly unlikely, leaving customers stuck for years with drawdown charges that are “complex, opaque and hard to compare”.
Swifter and firmer action is to be taken on making customers engage more. The last thing most customers want to do is engage with their pension pot. Quite right, too. Engagement is a chimera that simply shifts the blame for poor retirement outcomes on to the hapless consumer who has neither the interest nor the knowledge to engage with their pension pot.
That view is borne out by the FCA’s evidence that only around 5 per cent of people “engage” with their pension when they receive the current wake-up pack: a large envelope stuffed with up to 100 pages of guides, documentation and something called signposting. The pack is, the FCA says, “largely ineffective”. The Treasury agrees.
So, the FCA proposes to replace this failed policy – with a wake-up pack! Instead of just sending it once, consumers will be given the opportunity to ignore it at least four times from the age of 50. It will still be full of paper but – crucially – some of the pages may be different colours and there will be a neat, one-page summary on the front.
Consumer testing by the Treasury found that 10 per cent more people read a clear one-page summary than struggled through a 25-page guide from the Money Advice Service and up to 75 more pages of information. So, the new pack will still be 85 per cent ineffective.
Just two out of a dozen proposals in the three main documents and their 81,293 words. I can feel another column coming on…
Paul Lewis is a freelance journalist and presenter of BBC Radio 4’s ‘Money Box’ programme. You can follow him on Twitter @paullewismoney