How the FCA probe will hit pension providers

How the FCA probe will hit pension providers

Regulatory scrutiny on the value for money of old-style pension contracts and ‘default' arrangements has been cautiously backed by the companies most likely to feel the Financial Conduct Authority's wrath if it finds unfair practices, amid tacit acceptance some problems exist in the sector.

On Friday (2 February) the FCA issued its latest discussion paper inviting industry feedback on aspects of the non-workplace pensions market.

The regulator raised concerns about value for money in products and whether consumers were engaged enough to take steps to seek out better options.

Article continues after advert

It had already conducted a similar study of the workplace pensions market, which resulted in interventions on price - in particular a cap on auto-enrolment default funds - and the introduction of independent governance committees at life companies, which would monitor the ongoing value for money offered in workplace personal pension schemes.

The FCA stated in its paper it was concerned pensions sold before 2001 were at risk of delivering poor value for money.

The regulator had detected complex charging structures among legacy workplace schemes and considered a similar problem could be found in the non-workplace area.

Tom McPhail, head of policy at Hargreaves Lansdown, agreed the regulator could encounter issues around older books of business, which tended to charge more than modern products such as low cost self-invested personal pensions.

Steven Cameron, pensions director at Aegon, suggested it could consider a form of light intervention in the space, such as initiating to move people automatically from old style individual pensions to newer style pensions.

But such a move could prove tricky, said Fiona Tait, technical director at Intelligent Pensions, as the products could include in-built features consumers may not wish to give up, such as guarantees. 

The regulator is also concerned about two-tier charging structures, where members pay lower charges while they contribute to the scheme and are hit by higher charges thereafter.

The government has outlawed such charges on workplace pensions.

This typically affects people in bundled products where commission paid out to advisers pre-Retail Distribution Review (RDR) has not been recouped yet because it may have been priced over more than 20 years.

Mr Cameron believed the regulator would shy away from banning providers from recouping such charges.

But there are examples where providers are voluntarily offering consumers newer products, effectively waiving those charges, he added.

Intelligent Pensions's Ms Tait said: "The first test will be whether or not the overall charge was fair in the first place."

On newer default schemes the government introduced a 0.75 per cent cap in the workplace sector after it became concerned consumers, confused about the charges they were paying, could be paying too much in the long run.

Similar concerns persist in the non-workplace sector where people are being moved into so-called informal defaults - those holding the assets of at least 80 per cent of the scheme's investors.

Ms Tait saw no problems with pseudo default funds as long as they were competitively priced from the outset. 

But Mike Barrett, consulting director at the Lang Cat, said the regulator was right to question the suitability of such funds for investors.