In its latest major report on the functioning of the UK pensions industry, published today, Monday 5 August 2019, the Work and Pensions Committee says it is “unconvinced” that the industry will rise to the challenge of providing clear, transparent information to pension schemes about the costs and charges of investments. It says “Government and regulators should not wait for the industry to fail to act voluntarily as they have so many times in the past”, and should instead move now to legislate for mandatory disclosure to a set format, for both defined contribution and defined benefit schemes. Better scrutiny of value for money in defined benefit schemes will also either justify or avoid the need for the often difficult decisions being taken about the future of those schemes.
Rt Hon Frank Field MP, Chair of the Committee, said:
“Ripping off pension savers could be eliminated. The select committee is calling on the Government to shine the searchlights into that part of the financial industry that has settled down to misinforming, mischarging, overcharging and making a fat living off the hard-earned savings of pensioners. Government and regulators should not wait for the industry to fail to act voluntarily as they have so many times in the past. It must put the full force of the law behind such changes.”
Compliance with the new mandatory disclosure regime should be overseen by the relevant regulators, who should be given any additional powers they might need to tackle non-compliance. The information provided should be available for scheme members as part of the wider information on value for money, as well as information on exit charges and any other costs associated with transfer of their pot. The FCA should explore the creation of a public register of asset managers’ record of compliance with reasonable data requests.
It is important for trustees and others managing pension schemes to demonstrate whether or not they are delivering value for money in a way which can be compared across the industry and is accessible to the scheme members. But the inquiry found that some trustees are making investment decisions when they simply don’t know the true scale of the costs that they are incurring—and it does not appear that these are isolated cases. This is coupled with asset managers’ unwillingness to disclose all the explicit and implicit costs attached to each investment: “it is near impossible for investors to figure out how much their investments are costing them because additional costs are hidden and too high”.
For individuals, the charge cap of 0.75% on defined contribution pension schemes used for automatic enrolment does not appear to have caused charges to rise to the level at which it was set, with average charges being between 0.38 and 0.54% depending on the scheme type. But not all charges are covered by the cap, and the full extent of charges outside the cap is not known. That makes it impossible to know how well the cap is working in practice. The permitted combination of a flat fee plus a percentage of funds under management charge has the potential to completely erode small dormant investment pots. If this were to happen, many savers’ confidence in automatic enrolment could be fatally undermined.
DWP should review the level and scope of the charge cap, as well as permitted charging structures, in 2020. The review should consider preventing flat fee charging structures being applied to dormant pension pots and revisit measures to proactively consolidate smaller pots.
The Committee says that contrary to the two responsible ministers’ “complacent” assessments in evidence, it is unconvinced that any part of the industry scores above half marks on transparency.
With latest reports that £2bn was lifted out of pension savings by unscrupulous advisers in one year alone, the Committee was concerned to hear that the FCA’s dedicated scams team only consisted of approximately 10 people, out of 3,700 FCA staff. The FCA should review whether it dedicates sufficient resource to combat active pension scams, prevent new pension scams and protect individuals: “Scams are not a necessary consequence of the pension freedoms.”
The Committee has previously criticised the FCA’s “inscrutable” register of financial advisers, with the Chair noting it would take “a degree and orienteering skills to figure out which firms” the FCA had banned from giving advice, further compounding the problem of “phoenix firms” that voluntarily go out of business to avoid compensation claims against them and then simply reappear under a new name. The FCA’s list of unauthorised firms should be expanded into a widely publicised database. This database should be regularly updated by the range of governmental organisations involved in pension scams and act as a co-ordinated early warning system.
The Committee recognises that many Independent Financial Advisers provide good value for money for pension customers: however, the number of people paying for good value advice is low. People who are not able to access good advice need guidance and effective protection from pension scams, which can have life changing impacts. Scams not only harm the individual but cause wider damage to the industry by discouraging potential savers.
A non-commercial pensions dashboard will be a welcome, if overdue, additional tool to provide transparency to individuals and help them plan how they use their pension funds. For a pensions dashboard to be launched in a timely manner, it will necessarily be limited at the outset. This should not be at the expense of any of the key data on an individual’s pension savings, and personal State Pension projections must be included in the Pensions Dashboard at launch, as they form a key component of many individuals’ pension incomes.
After a series of delays and question marks over its creation, the Committee says Government must publish a timetable, by the end of this year, for the rollout of a non-commercial pensions dashboard. This should include key milestones, such as the date for pension providers to include their data on the pensions dashboard, as well as target timescales for phases beyond the initial launch—for example, longer term plans to enable consumers to make value for money comparisons through the pensions dashboard. The pensions dashboard should also feature retirement income targets to ensure the information is meaningful to its users.
Government should urgently resolve the discrepancy between ‘net pay’ and ‘relief at source’ tax relief that, over a lifetime of pension saving, will make a significant difference to many people and a represent a significant proportion of their pension savings built up through automatic enrolment. The Government says that it would cost too much to put this right. In doing so, it risks damaging faith in the system, by perpetuating arrangements which cause individuals to lose significant sums through decisions they did not make.
Advice and Guidance
In 2017, in its major report on Pensions Freedoms, the Committee called for a 0.75% charge cap on investment pathways. In a near repeat of the conversation the Committee had with the FCA about schemes used for automatic enrolment savings —now the subject of a charge cap—the FCA said it would prefer to see if market-consistent tools work first. Rather than issuing vague threats to the industry, the FCA should send a simpler message to the industry by setting a 0.75% charge cap for the investment pathways from the outset.
The FCA published its final plans for investment pathways last week. These must not become a substitute for guidance, which is still required to help individuals determine which product is right for them. It is not clear how, under the proposed investment pathways, an individual who states that they plan to use their money to set up a guaranteed income is supported to do so without guidance. Many people who have passively built up retirement savings through automatic enrolment would likely need support through advice or guidance if they wanted to make an informed choice on purchasing a product which provides a guaranteed income.
The FCA should implement a robust monitoring programme for the effectiveness of the investment pathways, including value for money comparisons with other available products, in partnership with any other DWP monitoring work of the pension freedoms.
Image: Nick Youngson/Alpha Stock Images