FCA turns its attention to non-workplace pensions
For intermediaries and employers only
When it comes to pensions, the political and regulatory focus has been very much on the workplace. But this is changing with the launch of the FCA discussion paper Effective competition in non-workplace pensions. The FCA wants to better understand the non-workplace pensions market, to determine if competition is working well and to consider if there’s a need for regulatory action to protect consumers.
For workplace pensions, the market has changed significantly in recent years. The Government’s huge and so far successful auto-enrolment initiative means millions of additional employees are in workplace pensions. Following an Office of Fair Trading review, and to address its finding of weak ‘demand side competition’ in that market, Independent Governance Committees were introduced, tasked with driving value for money for members. And of course we also have a charge cap where individuals are auto-enrolled into the default fund of their workplace pension.
But with the growing population of self-employed and gig economy workers not currently in scope for auto-enrolment, it’s perhaps not surprising the FCA wants to consider whether any of the issues previously identified in the workplace market are present in non-workplace pensions.
What’s in scope?
The FCA defines non-workplace pensions as individual personal pensions, stakeholder, buyouts, Free Standing AVC and Section 226 contracts, the latter being the standard self-employed pension before personal pensions were introduced in 1988. The decumulation stage is not in scope, having already come under scrutiny within the Retirement Outcomes Review.
The FCA will consider potential barriers to ‘demand side’ competition, whether this is related to product complexity, levels of individual engagement or fund choice. It will look at the impact of charges including paid-up and exit charges, how transparent charges are and the effectiveness of communication. It’s also exploring whether the principles underpinning Independent Governance Committees could be extended to work to drive better value for money for non-workplace customers.
The similarities and differences to workplace pensions
The FCA accepts and will take into account differences between the workplace and non-workplace pensions markets and it’s good to know it won’t start with an assumption that the same rules and remedies should apply to both markets.
To me, the key difference is that in the non-workplace market, individuals are proactively choosing to invest in a pension. Under auto-enrolment, they’re defaulted into a scheme and fund chosen by someone else and are not required to engage or make any decisions.
Compared to employees, individuals investing in non-workplace pensions are also more likely to seek advice on the product, fund to invest in (there’s no ‘default’ fund) and contribution level. Advisers will recommend the most suitable product and fund for each individual, something simply not present in an auto enrolment context. The FCA does differentiate between advised and non-advised, accepting non-workplace savers are more likely to seek advice. However, the paper also highlights that ongoing advice is not always provided, and in its absence, particularly for older policies, individuals may not be equipped to make ongoing decisions.
It will also be important for the FCA to take into account the economies of scale present in many workplaces which can allow lower charges than for individual business.
The OFT expressed concerns about the infrequency of employers switching schemes between providers. The FCA will need to form a view on whether frequent switching by individuals is a necessary element of a competitive market or whether such pensions should be relatively long term investments.
Many of those with non-workplace pensions will be self-employed. The Government has announced plans to consider how to apply the concepts behind auto-enrolment to this population. It’s hugely important to encourage greater take-up of pensions amongst the self-employed to avoid them becoming second class pension citizens. The Government is due to advance its thinking here during 2018, which overlaps with the timeline of the FCA work.
Over the next year or so, we’ll see further developments around pension dashboards. These should lead to individuals being more engaged with all of their current and previous pensions, workplace and individual. For some, this will prompt them to seek advice on transfers and consolidation. This should go some way to boosting competition and lead to improved value for money, the two key aims of this FCA review.
Our initial thoughts
The FCA’s discussion paper will gather information ahead of a request for data. There’s an opportunity at this initial stage to identify and avoid overlaps with other initiatives. For example, the review of longstanding customers has already included many individuals with older style non-workplace pensions. And some SIPPs are part of the Investment Platform Market Study.
To aid the analysis, we hope the FCA will recognise different practices over different time periods. For example, the market changed dramatically when stakeholder pensions were introduced in 2000, with a move to a single annual management charge. A pre and post stakeholder split would seem logical, with a question over whether the FCA really needs to question the value for money of stakeholder pensions with their Government set charge cap in this review.
I hope the review will also seek to identify good practice where providers are voluntarily offering more modern products to legacy customers, for example on their platforms. Support from the FCA in removing any barriers here would be welcome.
Of course, many individuals will spend periods in both employment and self-employment meaning the markets can’t be considered as completely separate. The FCA should also take an interest in processes for transferring between and consolidating individual and workplace pensions.
We have until 27 April 2018 to respond and after considering feedback, the FCA will issue a data request to non-workplace pension providers to establish an evidence base from which to assess if there are problems, and if so of what scale. In parallel, it will undertake qualitative consumer research examining the extent to which consumers are sufficiently engaged, informed and empowered to make effective decisions about their pensions throughout their retirement savings journey. Then later in 2018, it will publish feedback on the themes arising and if it finds evidence of consumer harm, it will then consult on proposed remedies.
This investigation emphasises the FCA’s interest in driving competition and value for money. It offers further demonstration of the key role played by the adviser community.