Opinion 

My concerns with the non-workplace pension review

Martin Tilley

Martin Tilley

The Financial Conduct Authority’s (FCA) Discussion Paper DP18/1 raises concerns about good consumer outcomes in relation to the non-workplace pension market.

It invites feedback from providers and consumers to identify the following:

  • The factors that influence the behaviours of consumers and providers of non-workplace pensions, and 
  • Whether the current market dynamics ensure fair outcomes for consumers. 

The responses to the paper, due before 27 April, will be used to gauge to what degree the FCA needs to engage and collect data from providers which will be an evidence base from which to test the existence and scale of any problems identified.

The reason for the FCA investigation is clear. Non-workplace pensions represent around £400bn of assets under management, significantly more than is currently held in defined contribution workplace schemes, with an estimated one in four adults holding a non-workplace pension.

The FCA focus is on three statutory objectives:

  • Consumer protection – to ensure value for money and fair outcomes for consumers.
  • Market integrity – providers to consider customers’ best interests at all levels of their business operation.
  • Competition – which should work in the interests of the consumer.

The review focuses on costs, which of course are key in determining fair consumer outcomes.

However, respondents should also consider what is fair to the provider.

The discussion paper is seeking the views of not only the industry but also the participants of non-workplace pensions, which should give the regulator views from “both sides of the fence”.

The problem I foresee is the calibre of the information they may obtain from the consumer. 

The discussion paper already highlights the wide range of non-workplace pension products that have evolved over time and taken into account multiple changes introduced by HM Revenue and Customs, DWP and HM Treasury. They include:

  • Individual personal pensions
  • Stakeholder personal pensions
  • Retirement Annuity Contracts
  • Freestanding AVCs
  • Section 32 buyout plans
  • Self-invested personal pensions (Sipps)

These products are enormously diverse and the paper acknowledges that a wide range of individuals who hold, or have held, non-workplace pensions might respond. 

Singled out specifically has been the growth in the Sipp market. Sales of Sipps more than doubled in 2013 and continued to rise through to 2016.

The paper also notes the divergence of this market into low cost (and often lower value) Sipps and the full range of bespoke Sipps, but responses to the paper need to expand upon this. 

Low cost Sipps will usually offer access only to platforms and standard assets. Administration is largely technology driven, with charges based upon percentage points of assets under administration. 

Conversely, bespoke Sipps offer a far wider range of standard and non-standard assets, including commercial property, third party loans and private equity.

The nature of these very individual investments is such that technology currently plays a very limited role in streamlining investment processes which are largely manual in their due diligence and administration.

Their fees are largely derived from time taken to undertake administrative and transactional duties rather than attributable to the value of any asset being administered.

As a result, I would contend that the two are very different vehicles, the former being a financial product and the latter being a financial service.

It is essential, therefore, that respondents to the review make it clear that bespoke Sipps should not be grouped together with unrelated products where the regulator may take action to cap costs in line with asset values in a general statement of conformity.

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