By Fiona Tait, Technical Director, Intelligent Pensions
The AE Effect
It’s well known in the industry that as a result of automatic enrolment (AE) more people are saving but they are not saving enough and the Sector Review considers that “the prospect that consumers may not get a retirement income that meets their needs or expectations remains the central harm for the sector.” According to the Pensions and Lifetime Savings Association (PLSA) the vast majority of adults have a greater than 60% chance of seeing their living standards fall significantly when they retire.
The regulator recognises that changes are needed at a societal level, and states that the Department for Work and Pensions (DWP) have promised another review to evaluate the effect of increasing monetary contributions. Hopefully this will lead to some movement on the suggestions raised in 2017.
Another emerging trend is the proliferation of small pots which result from people being automatically enrolled and moving jobs.
Multiple small pension pots are usually more costly than a consolidated plan and it will be interesting to see if action will be taken to encourage employers to do more, or whether we will see the revival of ‘pot follows member’.
On the subject of cost, the FCA clearly has the view that workplace pensions provide the benchmark against which other products should be measured. AE has driven the rise of mastertrusts which provide economies of scale that the regulator expects to see passed on to their members. In their view non-workplace pensions show too much variation and opacity in their charges and this will continue to be a theme. Workplace pensions are of course designed to provide a one-size-fits-all solution and there is no doubt that alternative solutions are required, particularly in the decumulation space, however the FCA is keen to see that consumers are only paying for additional services and features which they actually need.
The Technology Effect
The increasing use of technology is a key theme in each of the sectors reviewed. The regulator recognises that technology drives efficiency as well as increasing consumer engagement and provides support for this via its TechSprint project.
The downside is however that reliance on technology increases the risk of cyber-crime and high levels of scams and financial crime continues to cause concern. In 2018 Action Fraud reported over £197 million reported losses to investment scams, although the incident of “new” scams seems to be decreasing in the retirement sector. This is exacerbated by the rise of open finance and will continue to require improvements in security systems as well as client authentication processes.
Technology also has to be kept up to date. The FCA’s previous cyber and technology resilience report found that the biggest cause of pension service outrages resulted from poor change management within firms, as evidenced by a number of recent high-profile re-platforming exercises.
Technology also facilitates access to more personal data. This allows insurance providers to tailor their products and reduce the impact of taking on high risk customers. Within the pension sector this most obviously affects the annuity market, where decreases in healthy life-expectancy may have a further impact on the rates available.
The Usual Suspects
The review draws attention to the fact that there has been an 86% increase in open Financial Ombudsman Service (FOS) complaints against self invested personal pensions (SIPPs), and a 36% increase in complaints about income drawdown. It does acknowledge that complaint levels are in fact relatively low in the pensions sector but points out that the uphold rate for those who do complain is relatively high. Interestingly, the majority of complaints relate to general administration or customer service suggesting that people remain blissfully unaware that these are considered to be high-risk products. FCA scrutiny is unlikely to abate.
Defined benefit (DB) transfers get their expected mention, with an FCA estimate that unsuitable transfers out of DB schemes could, collectively, result in losses of up to £20 billion worth of guarantees over 5 years. The regulator is no doubt happy to see that the number of DB transfers is decreasing, we can only hope that this is for the right reasons.
Poor consumer choices at retirement are also singled out for attention, which is unsurprising following the conclusion of the Retirement Outcome Reviews and the recent “Dear CEO” letter on the subject. On the one hand the regulator is concerned at the number of individuals entering drawdown on a non-advised basis, on the other it also worries that a higher proportion of advised consumers enter drawdown with the requirement for ongoing advice. This seems slightly contradictory, along with the fact that they are also troubled by the fact that most investment pathways still focus on an annuity end point. No doubt we will hear more soon.
In summary, not a lot of surprises, but a welcome recognition that its not all about bad behaviour.
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