A change of focus from fees to performance may be key to helping improve competition in non-workplace pensions.
The FCA’s discussion paper on effective competition in non-workplace pensions and the subsequent call for industry feedback was much needed.
We have already seen a radical shakeup in the workplace space, and while some issues are similar, there are many different problems to tackle in non-workplace pensions.
Comparisons with workplace pensions are not particularly helpful and the FCA should look to stay clear of this, especially from a supply-side. This is predominantly true when considering charges levied – given the difference in scale between workplace and non-workplace pensions.
It is clear that non-workplace pensions are a vital means by which people build a fund and take an income at retirement.
In the paper itself the FCA points out that this element of the market counts for around £400bn of assets and a whole host of products.
With one in four people holding this type of pension, value for money is clearly a key concern for the regulator, but achieving this by implementing a charge cap is not necessarily the right way of going about it. The focus should instead be on the outcome for consumers, rather than just cost.
While a charge cap has been successful for auto-enrolment schemes, it does not simply apply to non-workplace pensions.
There is a distinct lack of commonality across products that would make implementing a charge cap difficult. Another issue, as previously mentioned, is economy of scale.
The charge cap introduced in workplace pensions benefited from the sheer size of these schemes, whereas this would not be replicated in non-workplace pensions.
It is obvious that improved awareness of charges by consumers can be beneficial in driving down costs as providers become more aware of competition. However, awareness of price does not necessarily mean that consumers will understand the product and what is included. In the FCA’s own Financial Lives survey, 46 per cent of adults reported having a low knowledge about financial matters, and by no means are pensions an uncomplicated thing.
What we do not want to happen is for consumers to simply pick a product based on price, therefore potentially skipping talking to a professional financial adviser which can be crucial in selecting a product that suits the future requirements of an individual.
While consumers ‘engaging’ in non-workplace pensions are more likely to be engaged with their savings in a way many individuals in the workplace are not, this does not necessarily mean that the individual remains engaged or will have the level of knowledge required to choose the right product for them.
Cost is obviously an important factor when choosing any financial product but it should not be an overriding one. Therefore, by directing focus towards how the value of a product fits within the final outcome would, I believe, be more beneficial to consumers and providers.