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Pension freedoms prompt FCA scrutiny of private pensions market

Out-Law News | 06 Feb 2018 | 5:21 pm | 2 min. read

Personal pension providers should be ready for potential action from the Financial Conduct Authority (FCA) if a review uncovers competition, charging and value for money issues, experts have warned.

A discussion paper on 'non-workplace' pensions, published by the regulator, could be seen as "starting a similar ball rolling" regarding potential regulation as the FCA's workplace pensions agenda, which led to the introduction of the charges and governance regime in 2015, according to Tom Barton of Pinsent Masons, the law firm behind Out-Law.com.

"We've long made the point that workplace pensions are being regulated along the lines of a public utility," he said. "The charges and governance regime includes price controls and value for money assessments rarely found in other areas."

"In theory, retail pensions should be different to workplace pensions. The charges and governance measures were prompted by auto-enrolment and a governance vacuum. In retail, the dynamics are different: retail products might often look similar to workplace but are generally purchased through choice rather than any kind of 'soft' compulsion. Independent financial advisers are often in the mix too, which should take care of a lot of what we might call governance."

"That said, the pensions freedoms are starting to look like the same sort of prompt for scrutiny of retail that auto-enrolment was for workplace pensions. It creates a political imperative to look after money as though it were a public utility. If the charges and governance of retail products as a whole - or of a tranche of them, such as legacy products - do not stand up to that scrutiny then there's a good chance that the FCA will take some action," he said.

'Non-workplace' pensions collectively account for around £400 billion worth of assets under management, or more than double the amount invested in contract-based defined contribution workplace pension schemes, which are similarly regulated by the FCA. These products include individual personal pensions (IPPs), stakeholder personal pensions (SHPs), self-invested personal pensions (SIPPs), free-standing additional voluntary contributions (AVCs), s32 'buyouts' of workplace pensions and retirement annuities.

The FCA is seeking feedback on its discussion paper until 27 April 2018. It is seeking to understand how the differences and similarities between workplace and non-workplace pensions impact on consumers and competition. It is focusing in particular on product complexity; consumer motivation and the use of informal 'defaults'; whether customers can identify and freely move to more competitive products; and whether providers are effectively competing on charges.

The regulator will follow up the call for evidence with targeted data requests from product providers and a programme of "qualitative consumer research". It then intends to publish a second paper towards the end of the year setting out its findings. "Appropriate proportionate interventions" will be published for consultation at a later date if the evidence shows that these are required.

The FCA was clear in its paper that it does not assume that the same rules should necessarily be applied to non-workplace pensions as to workplace pensions. However, Tom Barton said that future rule changes could include price controls, disclosure requirements around costs and charges and "IGC-like functions to assess the value of retail pensions on an independent basis".

Although the FCA's work is at an early stage, financial services competition expert Robert Eriksson of Pinsent Masons said that it was likely that formal market intervention would follow.

"Interestingly, the FCA found it disproportionate to launch a full market study but believes that some of the weaknesses that the Office of Fair Trading identified in the market for workplace pensions also exist in the market for non-workplace pensions," he said. "The FCA is therefore likely to start considering remedies quite soon."

"Whilst stakeholders now have an opportunity until 27 April to submit views on the FCA's discussion paper, it is prudent to already start thinking about the types of remedies one supports and make comments in that context – in other words, to treat this as the start of an actual market study, rather than just mere fact-finding," he said.