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Poor value pensions targeted in latest FCA paper

FCA continues to stress importance of value in retirement income

FCA logo glass 3 620x430Poor value retirement income and personal pension products can cause “significant harm” to consumers, the FCA has ruled in its view on the sector this morning.

In its areas of focus, the FCA continues to stress the importance of products’ value for money. This comes after news last week that the regulator is introducing new rules forcing fund managers to ensure their products provide value for the end investor.

The views published are based on data collected by the FCA, and were published alongside this morning’s business plan, which unveiled plans for a 4 per cent increase in adviser levies.

Consumer confidence also remains a key area and the FCA emphasises the issue that consumer sentiment is “strongly affected” by failures of high profile employer schemes.

The regulator believes consumers are unlikely to shop around or switch provider when moving from accumulation to decumulation. It also believes “unsuitable advice” is an area of particular concern where consumers may be giving up “valuable guarantees”.

The regulator adds there is a growing use of master trusts in delivering auto-enrolment, particularly now the smallest employers are now enrolled. Group personal pension sales in 2016 were just shy of 1 million, while master trusts attracted 3 million additional members, showing they are becoming key defined contribution workplace providers alongside the more established life companies.

However, it says consumers are still struggling with the complexity of the pension system and the challenges in selecting products.

In terms of decumulation, as a result of the pension freedoms there has been a much publicised shift away from annuities towards drawdown products. Official figures now show drawdown attracted inflows of approximately £16.2bn in 2016 versus £4.6bn for annuities.

But contribution levels remain low. The ONS estimates less than 6 per cent of enrolled employees are making member contributions of more than 7 per cent of their salary.

Assets held or invested: Workplace pensions savings market

Defined benefit schemes £1,341bn
Defined contribution single employer trust £165bn
Defined contribution master trust £18bn
Defined contribution contract-based £168bn

Source: FCA

The FCA says both consumers and financial advisers are increasingly using platforms to buy and access retail investment products. Direct to consumer and share dealing services currently administer £170bn assets, and the total currently administered on platforms supporting the advice market totals £378bn.

Meanwhile, stocks and shares Isas remain the most popular investment, worth a total £267bn among an estimated 2.5m consumers. Despite low interest rates, 80 per cent of Isa investors opted for cash Isas in the tax year 2015/16 while stocks and shares accounted for just £21bn of the near £80bn Isa accounts.

The equity crowdfunding market – which has previously seen a rapid growth – shrank for the first time in 2016, as well as endowments and structured products seeing less uptake.

In other areas, the document shows that equity release has grown by 23 per cent in the past 12 months, totalling £9bn. The regulator suggests that while retiree debt levels are increasing, demand for equity release could go up.

Total size of assets held or invested (AuM):

Wealth management £824bn
Platforms £548bn
Equities and stocks and shares Isas £267bn

Source: FCA

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