Can you give us an overview of the FCA’s current work in the pensions space?
I’d highlight two things. One is that it would be good to get pension scheme members more engaged in the outcomes that are being delivered to them. The OFT highlighted the demand side is weak in this area.
The other thing is there is a quite significant structural change going on in terms of auto-enrolment and a number of other issues. We’re very keen to make sure that we get better and better outcomes for pension scheme members and for customers of individual pensions.
We have a new objective around making competition work in the interests of consumers so we’ve done work in some specific areas. That is the case in the annuity space. The announcements in the Budget probably add to the prominence of our work in that area; it gives us a framework to build on the research that we’ve already done and what we’re going to do moving forward.
When the thematic review of annuities started it was a market where people were virtually compelled to buy these products, and there was a potential lack of competition, either through consumer apathy or just not enough players in the market. But now by the time the final conclusions of the market study are delivered we’ll likely be in a situation where people don’t have to annuitise. Does that change the importance or the direction of the work?
I can’t go into detail in terms of precisely what that means on the work. The headline conclusion that came out of the report a month ago was that this market isn’t working well for consumers. We really wanted to prove whether customers could be significantly better off if they shopped around on the open market and the key finding was that they could. Although 60 per cent of members were sticking with their existing provider, 8 out of 10 of those could’ve been considerably financially better off if they’d switched.
I think the findings presented a solid base of evidence for change. Clearly, from the Budget we’ve got significant change being suggested, which we certainly welcome. Because I think that goes with the grain of the report.
Our report highlighted a couple of groups of customers we were particularly concerned about – one of those was small pots and the access that small pots had at retirement to annuities on the open market. It was possibly more an access issue than a price issue first and foremost. The announcements in terms of trivial commutation are really helpful in addressing that now, regardless of what happens in the consultation.
Tackling this issue of engagement, as I mentioned at the beginning, will be important in ensuring the government’s proposals are successful. The proposals include this idea that people will have access to guidance at the point of retirement, which we think is really important. It won’t just be a case of a pack of information, maybe lots of complicated options and then a form to sign, there’ll actually be some engagement.
That’s important, because regardless of how many options are available to people if they’re not engaged enough to make the best choice for them they won’t benefit.
That’s an area where I’m sure we will concentrate and we are intending to do that to some degree within the market study anyway. If people are not receptive and not engaging, then whatever liberated approach the government take might not have a very significant effect. I think that’s why the suggestion was coupled with this proposal that there is actually a conversation at retirement. The ABI have come out very recently with a similar proposal, this idea of a right to a conversation.
Will the market study look into the profitability of providers? It seems the thematic review found that people aren’t shopping around, but would they get value even if they get the absolute best deal available in the market?
The concept of the market study, and this is consistent with market studies that have been done by competition authorities previously, is trying to take quite a rounded look at the market and thinking about all the different ways in which it works. I’ve highlighted for example what you might call the demand side, but it would also look at the supply side and think about the economics. We’ll have to see in terms of the detail around where we concentrate in that particular part, recognising the Budget announcement. We’re trying to achieve that competition objective - that competition in the market is working well for consumers. We think in many ways the Budget announcements are creating some conditions where it should be possible to get competition working favourably.
It will be interesting to see what happens with annuity rates following that announcement. That must be something you’ll be taking an interest in?
I think what we’re trying to do is make sure that competition is working, that’s the priority. The fact is a number of drivers have been bringing annuity rates lower over time. Obviously there’s low interest rates, there’s increasing longevity. Inevitably the value that you get from purchasing an annuity is going to be dictated to a large extent by that. We identified in the thematic review that there seemed to be other factors, and we want to see the system working better and get competition working. It will be interesting to see how that develops.
In terms of the FCA and the powers available to the authority – what sort of measures could potentially be taken as a result of the review?
There are rules and principles that we’ve got that govern the way providers deal with their customers both in terms of the accumulation stage – pre-retirement, and also decumulation. We don’t go into this with a view that rule changes are required, necessarily, but obviously we have a number of opportunities there through rules. But not all of the pieces and the structures in the market are for us. Often, and I think particularly given announcements in the Budget and the resulting consultation, some of the findings that we develop will be really helpful inputs into that consultation process. There’s now a framework within which the market study should be able to contribute really positively. There could theoretically be rule changes if we consider that to be necessary. We are doing some follow-up work on the sales and retention practices of pension providers in terms of how they’re handling their existing customers. That will be important to provide a bit of context and input into the consultation that’s going on, but will also be a useful review of what’s happening in today’s world.
Pension liberation fraud
Can you give us an update on what the FCA is doing in the area of pension liberation fraud, in conjunction with the vast array of other groups involved?
This is an area of concern. We’re acutely aware in highlighting it as an issue - which I think is an important thing to do - what we don’t want to do is put people off from saving for retirement. That is potentially a danger. But it does seem to be a growing issue and it’s something that a number of parties are particularly concerned about so we’re keen to play our part in that. We’re contributing with a number of other agencies in terms of intelligence that we gather, and we do that in a number of ways. Often pension liberation fraud starts with unregulated introducers or businesses, and that’s an area we’re interested in. Strictly speaking, not being regulated they are beyond our reach, but when the business then comes through it often comes into a regulated firm, so we’re particularly keen that regulated firms are alert to those dangers.
We’ve been doing a piece of work on the SIPP market. This is only one element and I don’t want to over stress it, but there is some evidence of schemes that have arisen with unregulated and quite unusual and illiquid investments within pensions. That’s an area of a bit of concern for us, so we’ve been doing a bit of thematic work in the SIPP area looking at how operators are monitoring the kinds of investments within the SIPPs they run.
What impact do you expect the measures announced in the Budget, the tax changes in particular, to have on pension liberation fraud?
It increases the degree of access to not just income, but to capital. I think that’s been done on the basis that it could encourage more saving into pensions because there are fewer constraints on what you do with the money when you get to the point of retirement. At the moment there are some tax disencentives to cash in or move your pension and those will be diminished. What you’ve also got in this proposal is this impartial guidance people will have, which should hopefully draw out some of these potential risks in investing the money moving forward. And it should also highlight that one of the options that they ought to consider is buying an annuity. For many people that will continue to be a good option, but they’ll be doing it from a position of strength.
You mentioned the amount of authorities involved in tackling liberation fraud, is that a challenge in itself?
There’s quite well-orchestrated coordination between the different parties in many respects. Everyone is approaching it with the same mindset. Of course if you’re trying to put together a jigsaw puzzle and different people have different pieces then getting that intelligence working to the best effect is not easy. But I’m not sure there’s any other solution to it. The good part is there are lots of eyes and ears and different agencies that are now alert to the way in which this can develop, and are keeping their eyes open in their particular part. We’re very keen to participate in that and raise awareness both in terms of the responsibilities of the regulated firms, and by saying to people more generally that if they’re presented with something that looks too good to be true then it’s always worth asking a few questions because it probably is.
Have the FCA’s increased responsibilities around the competition objective, combined with the general pace of change in pensions, required much change within the organisation?
There’s a lot going on in this area, and it’s fair to say we’re putting greater focus on pensions as a priority area for us. Often that’s more about joining up internally in terms of the different elements of work that we’re doing and also joining up with other regulators, government departments, agencies and so on as we’ve discussed. It’s about coordinating all of that and having a coherent picture of what we’re trying to achieve, which at the end of the day is good outcomes for pension scheme members – customers of pensions. Sometimes we can do that because we’re in the lead on certain topics, often it’s because we’re actually supporting or enabling other bodies and other stakeholders. To give you an example, the Budget announcement around impartial guidance is an area that we’ve been asked to lead in, considering how that would actually work in practice. In the period following the RDR there’s interest in that whole area of advice, which entails a certain degree of rigour operating on behalf of clients looking at a fair and comprehensive view of the market and suitability, and then you’ve got other forms of distribution in a non-advised area. We’re already looking at that within the FCA. What we can do is bring some of our findings there to bear. Joining these things up will be the key to being successful.
Matt Ritchie is Deputy Editor, Pensions Age