City watchdogs are to probe whether personal pensions work fairly and offer savers value for money.
They will look at whether better protections need to be introduced for savers after an investigation into whether personal pensions – broadly, any private scheme not attached to an employer – are too complicated, hard to swap between, or over-priced.
Regulators are turning their attention to ‘non-workplace’ pensions after a sweeping overhaul of work schemes in recent years.
Retirement savings: At least one in four adults are believed to have money in personal pensions not linked to an employer
Government initiatives have seen millions of workers auto-enrolled into work pensions, and a 0.75 per cent top limit slapped on charges for the vast majority who stay put in ‘default’ investment funds.
The Financial Conduct Authority says people have around £400billion invested in personal pensions – more than double the amount in ‘defined contribution’ work pensions run by insurers and other outside providers.
But the service that savers get, the charges that they pay and the flexibility and transparency they are offered can vary massively.
This has become even more important following the introduction of rules that allow people to keep their money invested in pension plans through retirement and draw on it as they choose.
Defined contribution pensions, where both workers and employers contribute to retirement pot, have now largely replaced more generous and less risky final salary pensions.
People who save into work schemes, rather than personal pensions, enjoy the benefit of free employer contributions. But the FCA says research suggests that at least one in four adults have money saved in non-workplace pensions.
It notes they are diverse in terms of age, income and financial sophistication. They might be self-employed, not employed, working but not eligible to save into an employer scheme, or former members of work schemes whose savings were transferred to a private plan at some point.
What are personal pension schemes?
Retirement savings and investment schemes not linked to any employer are covered by the probe.
The FCA calls them ‘non-workplace pensions’ or ‘individual private pensions’ and says they include:
* Self Invested Personal Pensions (SIPPs) – Private plans giving a wide scope for investing retirement savings
* Stakeholder personal pensions (SHPs) – simple investment vehicles aimed mainly at the self-employed and employees earning £10-20k
* Free Standing Additional Voluntary Contributions (FSAVCs) – schemes allowing people to build up extra contributions outside a workplace scheme
* S32 buyouts – Workplace pensions transferred to private schemes (read more)
* Retirement annuities – typically with profits policies, operated between 1956 and 1988
* Individual personal pensions (IPPs) – Replaced retirement annuities from 1988, and allowed people to pay in contracted out state pension contributions.
The FCA gives a full explanations of these schemes in Annex 2 of its release explaining the consultation – see p42 and 43.
The FCA says it wants to explore the following issues when it comes to personal pensions:
Charges: ‘Whether providers are competing on charges and if there are barriers to consumers identifying, and choosing, from more competitive products’
Product complexity: ‘Most pensions are complicated products and product performance may not become apparent for many years.’ (See the box on the right for what types of products count as personal pensions)
Consumer behavior: ‘Factors which may reduce consumer motivation and ability to invest time and effort in decisions related to their pensions’
Swapping products: ‘Whether customers can identify and freely move to more competitive products’
Fund choice: ‘The FCA is concerned that informal defaults may be operating in the market for non-workplace pensions that are not subject to the same protection as defaults in workplace pensions,’ it says.
The FCA has launched a consultation following today’s publication of a ‘discussion paper’ here.
Usually the bulk of responses to these exercises come from the financial industry. But the watchdog wants to hear from individual savers too.
You can use the online response form here, or send an email to firstname.lastname@example.org.
Alternatively, you can write to Caroline Donellan, Financial Conduct Authority, 25 The North Colonnade, London E14 5HS.
After the consultation, the FCA plans to issue a data collection request to the pensions industry.
It says areas this is likely to cover are: a) the charges that apply to non-workplace pensions; and b) whether and how value for money and fair outcomes for customers are addressed by providers.
The FCA says: ‘Towards the end of the year, we aim to publish a further paper which will provide feedback on the themes arising from the responses to the discussion paper and the data collection. It will also include consultation proposals if the evidence we gather demonstrates harm to consumers.’
What does the finance industry say?
‘Following the Office of Fair Trading review of the workplace market and the growing popularity of SIPPs in the wake of the pension freedoms, it makes sense for the FCA to scrutinise competition in the non-workplace market,’ said Tom Selby, senior analyst at AJ Bell.
‘It is vital for the integrity of the UK pension system that savers are confident the products they invest in are value-for-money.
‘Furthermore, our own research points to an engagement gap emerging in the post-pension freedoms world, with many savers completely in the dark over how their retirement pot is invested.’
Tom McPhail, head of policy at Hargreaves Lansdown, said: ‘The character and size of the non-workplace pensions sector has changed significantly in recent years, with the bulk of new arrangements set up in recent years being SIPPs.
‘There’s evidence many investors are actively engaging with their savings, making choices about how their money is managed and invested.
‘There are also understandable regulatory concerns about legacy books of business and “forgotten pensions”. This discussion paper will be a good opportunity to explore these issues.’
TOP SIPPS FOR DIY PENSION INVESTORS