The Financial Conduct Authority is considering raising the compensation limits for the Financial Services Compensation Scheme to take the pension freedom reforms into account.
It said the reforms, introduced in 2015, had resulted in more consumers investing their pension funds on retirement in drawdown products instead of insurance-based annuities.
But this meant they could be subject to compensation limits of only £50,000.
At a £50,000 limit there are 33 per cent of pension plans which are not fully covered.
Increasing the limit to £150,000 would mean 9 per cent of plans would not be fully covered.
The FCA has acknowledged that any change to the limits could lead to levies increasing.
It said: “We must therefore find an appropriate balance between providing protection for consumers and ensuring FSCS funding is sustainable and affordable for firms.”
Data provided to the FCA from a sample of firms in the period July 2015 to March 2016 showed annuities accounted for less than 14 per cent of the total number of pots accessed for the first time to take an income or fully withdraw money as cash.
But FCA and Prudential Regulation Authority rules do not currently provide for pensions-specific compensation limits for claims for deposits, long-term insurance contracts or investments.
This means someone who buys a particular investment product is in the same position for FSCS limits, regardless of whether it is held in an Isa, Sipp or a defined contribution occupational pension scheme.
A consumer who invests via a life insurance contract will, under PRA rules, get 100 per cent of their money back if the provider firm fails but a consumer who makes a non-insurance investment can only receive a maximum of £50,000 per failed firm.
But the FCA has not recommended a limit and has asked the industry for views on what it should be.
This morning (14 December) the FCA made a number of proposals to smooth the cost of the FSCS levy for advisers.
These include redesigning the funding classes and making providers contribute more.
It has said it will look into a risk-based approach to the levy but at the moment it is limiting itself to gathering data on this issue but it has ruled out a product levy.
Keith Richards, chief executive of the Personal Finance Society, said this was disappointing.
But he said: “The Personal Finance Society first proposed the idea of merging the FSCS levy with the cost of professional indemnity insurance, and I’m pleased that this consultation will offer stakeholders an opportunity to put forward their views on potential reforms of both systems.
“The concept of a risk-based levy, where firms could be eligible for a discount if their behavior reduced risk, has merit and is certainly worth considering in more detail.”
“What’s most important is that the burden of FSCS funding is shifted to higher risk segments of our sector. Given the language used by the FCA in its consultation paper, I am optimistic that this will be the result of its review.”
