The Financial Conduct Authority (FCA) wants to see full disclosure of all fees charged by Sipp providers as it warned complex products and charges in the non-workplace pension market were hampering competition.
The regulator today (July 30) published its research into competition in the non-workplace pensions market, finding that “highly complex” charges across the industry were driving down consumer engagement and resulted in little switching between pension providers.
Due to this, the FCA proposed to introduce a requirement for firms to provide clearer information on the total charges incurred by the consumer and their impact at the point of opening a non-workplace pension as well as on an ongoing basis.
The regulator is inviting industry views on whether administration charges and transaction costs were an appropriate charging structure for non-workplace pensions and what additional categories the regulator should consider setting.
Non-workplace pensions are products such as individual personal pensions, stakeholder personal pensions, and self-invested personal pensions (Sipps).
They also include free standing additional voluntary contributions (FSAVCs), s32 buyouts, and retirement annuities.
Currently there is little switching between these type of pension products as consumers do not understand whether or not they are getting value for money with their pension pot and investments.
The FCA found that due to the process of choosing a pension being so complex, consumers often trying to make this as quick as possible and select standard products rather than choosing a provider which has the lowest charges or best benefits.
The FCA stated: “While low switching rates are not necessarily a cause for concern, the very low rates we found reinforce our view that low engagement, complex charges and a lack of awareness of charges prevent consumers from finding more competitive products.
“This leads to a lack of pressure on firms to compete on charges.”
In its 54-page paper the FCA also proposed a requirement for providers to regularly report standardised charges information to an independent body, which would most likely be the FCA.
The FCA would then collate and combine this information into a single dataset and make it available to the public.
It stated this would work in a similar manner to the publication of its complaints data.
Through this, providers may then feel pressured to improve their product offering, it stated.
The FCA stated: “We are currently working on a framework for assessing value for money together with the Pensions Regulator (TPR), as set out in our joint strategy.
“This may include benchmarking cost and charges, together with performance and service metrics. We plan to publish further detail of this work in the first quarter of 2020, and will consider feedback received to this paper as we carry out this work.”
The regulator acknowledged that one risk with publishing charges information was that consumers and advisers might be encouraged to select pensions on the basis of charges alone.
But as a consumer can be paying product charges, fund charges and also advice charges, the FCA argued that considering each charge in isolation, without taking into account their combined effect, would not be informative.
The FCA stated: “One pension product could have lower pension charges but more expensive funds.
"Consumers would have to consider the totality of both charges, and identify comparable funds across both. This is not a simple task.”
The FCA said, collectively, the non-workplace market represented about £400bn of assets under management, which was more than double the amount invested in contract-based defined contribution (DC) workplace pension schemes.
The regulator noted that sales of individual personal pensions had declined and only a tenth of those that the FCA sampled were open for new business.
Despite this, the market is dominated by individual personal pensions, which make up over half of all assets under management as funds continue to grow, according to the regulator.
Meanwhile, Sipps make up a third of the FCA sample and over 90 per cent of these accounts are open to new business, suggesting that Sipps and individual private pensions “are likely to continue to dominate the market in the future”.
The FCA also found that a minority of schemes had higher charges for consumers who stop contributing, otherwise known as paid-up charges.
However, nearly all schemes that have a form of paid-up charge in their charging structure are closed to new members.
The deadline for responses on the paper’s proposals is Tuesday, 8 October.
amy.austin@ft.com
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