The old-fashioned personal pension has commanded little attention in the era of self-invested personal pensions and small self-administered schemes, but its time out of the limelight has not been without incident.
As the savings plans fall from favour, policymakers’ recent actions are raising further questions for the sector.
Twelve months ago, some commentators suggested the imminent launch of the Lifetime Isa posed another threat to the plans’ popularity – among basic-rate taxpayers, at least – but the Lisa’s slow start has put paid to those suggestions for now. This year, recent developments suggest the threat has shifted from products to regulation.
The FCA’s focus on industry costs has ramped up recently, with asset management and platforms both under scrutiny over the past 18 months.
In February, the regulator broadened its focus to personal savings with the publication of a discussion paper titled ‘Effective competition in non-workplace pensions’. Within the report, the watchdog raises concerns that some older personal pensions “may have a relatively high [annual management charge] when compared with modern versions of the same fund (bundled or unbundled), even within the same firm/scheme”.
It adds: “If the provider doesn’t reduce charges in line with a modern version of the same fund, customers can only benefit from lower charges if they switch fund, product or provider.”
Steve Webb, director of policy at Royal London, welcomes the study. “Having reviewed workplace pensions and introduced measures to protect consumers, it is understandable that the FCA should turn its attention to non-workplace pensions, especially given the large and growing amounts invested,” he says, adding that firms will have to justify any costs that appear excessive.
Mr Webb notes that in some cases measures will be in place to recoup the adviser costs incurred at the initial sale, a method that has sometimes produced a better outcome for consumers than having all the commission costs recovered at the start of the policy.
“In this case, it would be wrong of regulators to simply retrospectively rip up these arrangements, but firms will be asked to ensure that apparently high ongoing charges are only about recouping costs not making an excess profit,” he says.
Claire Trott, head of pensions strategy at Technical Connection, believes the regulatory challenges go deeper than purely aiming for comparable costs.
“Flat fees favour larger funds and percentage charges favour smaller funds, but this doesn’t mean that all products with flat fees are suitable for those with larger funds because they may not meet their objectives or risk profile,” she says.
“The same applies to percentage charges. It will be something that the FCA needs to consider because too much simplicity will mean that competition in the market will be impacted.”
The regulator has shown in the past that it is not afraid of more radical change to the personal pensions market.
The introduction of stakeholder pensions in 2001 was designed to create a cap on maximum annual management charges and remove upfront fees and exit penalties. Furthermore, it arguably represented the origins of auto-enrolment (AE), as employers with five employees or more were forced to offer access to a group stakeholder pension to their staff. However, unlike AE, there was no requirement for employers or employees to contribute.