The Financial Conduct Authority (FCA) has set its sights on the cost of private pensions, warning it would act where it detected bad outcomes for consumers.
In its discussion paper on non-workplace pensions out today (2 February) the FCA said it wanted to find out whether firms were in fact competing on the annual management charge (AMC), the charge most common in defined contribution (DC) schemes, which covers the cost of administering the scheme and investing contributions.
It said it was concerned customers in older pension schemes may be paying higher charges than those in more modern contracts invested in the same fund.
The regulator also wants to find out to what extent customers are indeed switching to more cost-effective schemes.
It stated: “In an efficient market, the AMC is likely to be the charge on which firms are most likely to compete, but we need to collect further data to determine whether this is happening in practice.
“We are concerned that some older personal pensions may have a relatively high AMC when compared to modern versions of the same fund (bundled or unbundled), even within the same firm/scheme.”
It added: “While we can’t directly influence how much consumers pay into their pension, we have an important role to play in making sure that consumers can be confident that the contributions they pay in will deliver good outcomes and value for money.”
The FCA has long expected firms to provide value for money for their customers. This value could be eroded by high charges, which negate any rise in earnings.
The regulator said evidence from its recent Asset Management Market Study suggested there was no clear relationship between charges and performance.
Charges will always act as a drag on performance and reduce what investors actually receive, it pointed out.
It added: “Charges that continue after contributions cease to be paid have the capacity to erode the value of the pension pot completely.”
The FCA said the difference in charges between workplace schemes and non-workplace schemes was that the costs associated with non-workplace pensions were typically borne exclusively by the customer whereas, in some workplace DC pension schemes they might be borne by the sponsoring employer
In 2013, the Office of Fair Trading identified reduced competition on charges in workplace pensions, which it said, was due to complexity and how difficult it was to compare charges.
In response, the regulator introduced a cap on fund charges in auto-enrolment schemes and a ban on higher charges for people no longer contributing to their pension.
Since April 2015, charges within default funds of qualifying auto-enrolment schemes are capped at 0.75 per cent per year of funds under management.
The AMC on stakeholder (group and personal) pension plans is capped at 1.5 per cent per year for the first 10 years and 1 per cent thereafter.
Meanwhile, differential charging practices based on contribution status have been banned in workplace pensions schemes used for auto-enrolment since April 2016.