Standard Life has called on the FSA to scrutinise the use of external fund links in automatic enrolment default funds due to concerns about the lack of protection offered to savers.
Last week, the FSA announced it has launched a thematic review into the governance arrangements of the £800bn unit-linked fund sector. The aim of the review is to make sure there are sufficient protections in place for pension savers who are automatically enrolled into a unit-linked fund.
Specifically, the regulator will assess whether firms have adequate systems and controls in place to ensure that funds are administered and managed fairly and in accordance with customer expectations, assets backing unit-linked policies are appropriate for policyholders and policyholder benefits are calculated fairly and accurately.
The FSA expects to publish its findings in the Autumn.
Standard Life has raised concerns that scheme members who are invested in certain external fund links through their default fund could be exposed to losses should the external fund manager run into problems.
Head of workplace strategy Jamie Jenkins says: “We are keen to see the review include external fund links. Our concern is that for some external fund links, the structure of the fund mean the member is exposed to inappropriate levels of risk should one of the parties involved fail.
“As it stands, the insurer through which the policy is written is bearing much of the risk, but as fund holdings enter the billions of pounds this cannot be borne indefinitely without, ultimately, risk to members themselves.
“We do not think this is appropriate, certainly under auto-enrolment.”
An FSA spokeswoman says: “The scope of our unit-linked fund review does not include specific issues relating to auto-enrolment such as the suitability of default funds. We would expect firms to consider policyholders’ interests when selecting default funds.
“However as part of our review we will assess where policies are linked to external funds such as specific collective investment schemes, the potential exposure of policyholders to counterparty credit risk and how this is mitigated by regulated firms. If policyholders are expected to bear counterparty credit risk this must be clearly explained to them so they can make an informed decision whether to invest in the fund.”