Regulators warn of pension failings

Regulators warn of pension failings

The Financial Conduct Authority (FCA) and The Pensions Regulator (TPR) have warned that customers’ money was not being properly managed by some schemes.

In their joint strategy published today (18 October) the two regulators said they were concerned about smaller trust-based schemes which lacked the the skills or influence to achieve good outcomes for their members.

They also raised concerns about the management of money by ‘orphaned’ schemes which no longer have a trustee, or an investment adviser looking after the default arrangement.

Further concerns were reiterated about unsuitable investments being included in non-workplace pensions, particularly self-invested personal pension schemes (Sipps).

The regulators also warned about insufficient attention being given to financially material Environmental, Social and Governance (ESG) factors in investment decision-making.

This had been flagged by the Law Commission in its recent reports on fiduciary duties of investment intermediaries and on pension funds and social investment.

Under new government rules pension schemes with more than 100 members will be forced to disclose the risks of their investments, including the ones arising from ESG considerations, by 1 October 2019.

The 25-page paper, titled Regulating the pensions and retirement income sector: our joint regulatory strategy stated the funding positions of defined benefit (DB) schemes were marginally better compared with three years ago.

But it warned of differences between individual schemes, where funding positions depended on the valuation date and other specific circumstances such as their approach to risk management.

It its Retirement Outcomes Review out earlier this year the FCA had flagged several concerns around consumers’ savings not being invested appropriately within retirement income products such as drawdown.

Today's paper reiterated: "This includes, specifically, the number of consumers whose pensions are invested in cash or cash-like assets after accessing their tax-free lump sum, which limits potential for growth, even though they may have a potentially long time to retirement."

Tim Holmes, managing director at Salisbury House Wealth, said over-investment in cash had long been overlooked and it was "high time something was done".

He said: "It is a major problem in the UK that the default option for many investors withdrawing from their pension is cash or cash-like assets.

"All academic data, almost without exception, shows that cash underperforms other major asset classes over the medium and long-term. Investing solely in cash can be hugely detrimental."

He added: "The average investor will find it impossible to build up a significant pension pot if they switch out of higher return assets into cash too early.

"Anyone thinking of drawing funds from their pension, or anyone already drawing funds, should seek professional advice to ensure they make the right decisions."

In their paper the regulators set out their priorities for the way in which schemes can help members make the best decisions on their pensions and retirement.

They vowed to crack down on value for money in pensions, saying they would set and enforce clear standards and using a broader range of regulatory interventions to drive value for money.