Pensions patchwork needs urgent regulatory reform

Michelle Highman warned that there was still too little protection on offer from the FCA and from the Prudential Regulation Authority, with the FCA still behind the curve in terms of setting compensation for pension products under its remit, such as income drawdown schemes.

As a result, pensioners may find that depending on how they choose to take their pension, the level of compensation that may be available to them varies considerably.

She said that if a firm collapsed while someone was building up their pot, the saver would receive 90 per cent of the fund value under the Financial Services Compensation Scheme.

Ms Highman said: “As the market adjusts and begins to offer mass-market drawdown products, there is a heightened risk that some of those providers will get their models wrong and potentially fail.

“A consumer with £100,000 invested in a drawdown product with a provider that then shuts down would lose half of their pension, with dire consequences for them and a larger burden placed on the state.”

This means consumers may be left with no choice but to buy an annuity - which under PRA rules enables them to be covered for the entire policy.

Ms Highman said: “The patchwork of protection we currently have is not fit for purpose in the new pensions landscape. A £50,000 protection limit is particularly inadequate.”

She added that both regulators should urgently review the levels of protection available to consumers across the market.

Ray Chinn, head of pensions at LV=, said: “The Money Charity is absolutely right, there is a variation in the protection limits, especially with Sipps. With different ways of generating income from different pots, it is important that customers are clear about the safety of their assets, and what they are covered for and what they are not.

“Of course, we hope that companies will not fail, but we cannot guarantee this will not happen. Bringing some consistency to the market will be very important, although if the compensation limits are raised, someone, somewhere across the industry will have to pay for it.”

A spokesman for the FCA said: “The new pension freedoms allow consumers access to a broader range of products than previously, and it is important that consumers know what level of protection they will be covered by when they purchase a product. This is one of the issues we will explore in our forthcoming discussion paper looking more widely at firms’ communications with consumers.”

Adviser view

David Trenner, technical director for Glasgow-based Intelligent Pensions, said: “I think the Money Charity is wrong. It should be going after people who sell unregulated collective investment schemes to people who do not understand them; if it looks too good to be true then it is too good to be true.

“The problem is that clients whose Sipps invest in Ucis are not covered, because Ucis are not regulated. Anything that is held in a Sipp is protected by the FSCS unless it is unregulated.

“That said, the Scheme Trustee is a non-trading bare trustee and therefore should not fail, and even if it did, any Sipp assets are ring-fenced from creditors of the Sipp operator.”