Written evidence from PIMFA (PCT0024)

PIMFA is happy to contribute to this inquiry into the transparency of pension schemes. We support moves for greater transparency within the pensions sector provided that information is provided to the right audiences and in the right context. We believe that it is right that advisers, trustees and IGCs are able to adequately assess whether the decisions they make on behalf of savers will ultimately provide the best possible outcomes for their clients. Ultimately, the ‘value’ of one’s pension and decisions made in building it should be assessed on the basis of the outcome, rather than the cost of it and this is something we are particularly keen to impress upon the Committee.

We also take the view that transparency and engagement should not be considered ends in and of themselves. It is occasionally tempting to ascribe simplistic solutions to issues which are complex, and this is particularly the case with reference to the long term savings market. As above, we support moves to make financial services products more transparent, we believe that it would be preferable for more UK savers to be engaged in their savings. But we also have to be realistic about the sort of behaviour and the types of outcome this would engender. 

It is not the case that savers that are engaged with their savings will automatically make good, rational decisions. Further, we are concerned that providing savers with complex investment information, devoid of context may encourage them to make rash decisions regarding their financial futures that they are patently unable to undertake. Financial literacy has been found to be low across the OECD[1]  with only 48 per cent of adults reported as being aware of the additional benefits of interest compounding on savings, with only 65 per cent able to compute a simple interest on savings. Only two in three adults are aware that it is possible to reduce investment risk by buying a range of different stocks.

We believe, that in the main, the majority of savers need an element of support with decisions pertaining to their pension. The rise of master trusts and the popularity of default funds is a recognition of this, as are recent recommendations from the FCA to introduce guided pathways for disengaged savers. These bodies largely exist to both assess value for money and broader performance on mass market solutions for individuals savers and they are largely performing the role they set out to do.

We remain of the view that where possible, savers should access regulated financial advice. There is a demonstrably positive impact on an individual’s savings where they access financial advice[2]. Because of the nature of automatic enrolment and freedom and choice, we believe that the role of financial advisers going forward will be particularly crucial at the point of retirement. Individuals who have remained largely disengaged from their saving will require a level of support which cannot realistically be provided by Trustees and IGCs. However, we are realistic both about the nature of the market for financial advice and the supply of it.

Crucial to encouraging the take up of regulated advice is ensuring that people understand the implicit value of something that they may never have received and as a result, are unwilling to pay for. We believe that the government and Regulator could do more to push those that would benefit from financial advice towards it, in particular we believe that initiatives like the advice allowance[3] should be signposted in wake-up packs for savers. Further, we believe that in future, consideration should be given to increasing the threshold (or consolidating it into one tax year) and requiring providers to offer it.

We would be very happy to engage further with the Committee on this inquiry and look forward to hearing from you in future.

September 2018

1. Do higher cost providers deliver higher performance, or simply eat into clients’ savings?

Our own analysis of the market shows that in the main, very few funds which we would consider to be costly in comparison to an indices tracker are performing poorly. However, it is also true to say that it is not always the case that higher cost providers deliver higher performance although we would necessarily agree that this means that they are ‘eating into clients’ savings.

In this regard, it is important to assess the value of a product beyond its investment performance. This is particularly the case for a number of pension schemes which deliver additional benefits beyond pure financial performance – e.g. the guarantee of contributions in DC schemes which occurs in some contract based schemes.

As we set out above, we believe that the value of a scheme needs to be assessed on the outcome of the saver. We are particularly concerned with the focus of this inquiry in that value is being assessed through the prism of cost. This train of thought, in the long run, will lead to worse outcomes for savers. We do not believe that it is desirable for Trustees, IGCs and Advisory firms to build investment strategies for savers which are ultimately predicated on the cost of a product rather than its utility to the saver. Followed through to its logical conclusion this would result in largely passive tracker investments, incentive to not deal and an element of decision paralysis which ultimately will lead to worse outcomes for savers.

2. Is the government doing enough to ensure that workplace pension savers get value for money?

We believe that the government has taken significant steps in ensuring value for money in workplace pension schemes since the publication of the OFT’s workplace pension market study[4]. Whilst the findings of this report led to the introduction of a charge cap, we would resist any moves which seek to assess value for money solely on the basis of cost.

Recent findings from Defaqto[5] set out a number of areas in which funds should be assessed. Further, they found that no individual fund outperformed its peers in every subject area considered. In our view this is a function of the fact that the workplace pension market has, in effect, become largely self-regulating. Because of the nature of automatic enrolment and the relative consolidation we have seen in the market through the introduction of multi-employer master trusts such as NEST, People’s and SMART Pension, competition in the workplace pension market is thriving and, as a result, standards are improving whilst costs remain low.

We would note that before the introduction of the 0.75% charge cap, the majority of automatic enrolment schemes were providing occupational schemes at or around 50bps. We see no reason why, as a result, that cap needs to be lowered.

3. What is the relative importance of empowering consumers or regulating providers?

In our view, both hold equal importance – the role of regulation should be to both regulate providers but also generate an environment in which consumers can make choices which do not carry the risk of financial detriment. The recent recommendations set out in the Retirement Outcomes Review[6] are a recognition of the fact that consumer choices, unsupported, tend to lead to demonstratively worse outcomes than those are supported through regulated financial advice.

A balance needs to be found between the regulation of providers and empowering consumers to make decisions. However, we need to be realistic about the fact that there is an element of complexity to pensions and retirement choices which cannot just be overcome through the easy access of information and the engagement of savers. As we set out above, transparency cannot be an end in itself, and the same is true of engagement. We recognise the positive impact that a more engaged savings population could have, but we also need to be cognisant that engagement can also engender negative behaviour as well as positive.

It is unrealistic to expect the majority of individuals to make good investment decisions relating to retirement without an element of support. These decisions are complex, require an understanding of financial markets, their own longevity, the sustainability of their pension pot etc. Consumers should be empowered to engage with these decisions at an early stage in their lives, but it is unrealistic to expect the majority of them to be able to take control of these decision without support provided either by a financial adviser or, in the case of recent findings by the FCA, an IGC or Trustee Board.

4. How can savers be encouraged to engage with their savings?

Ultimately, savings and investments are incredibly personal concepts and as a result, individuals will choose to engage in highly individualised ways from individualised prompts. However, there are some generalisations which we can make about finding the right touch points to drive individual engagement.

We believe that there is significant merit in advancing initiatives such as the mid-life financial MOT[7], an initiative we believe should be delivered through the workplace. We are also supportive of moves by the FCA to oblige firms to send out pension wake-up packs to consumers from the age of 50. We believe that these moves will encourage savers to engage with their savings at an earlier date, although we believe that as well as signposting individuals towards free guidance, advice, and in particular the advice allowance should be signposted as well.

Broadly speaking, we remain relatively relaxed about a lack of engagement earlier on in the accumulation phase. We have to be cognisant of the overwhelming driver in boosting pension participation – inertia – and we would be wise to not disrupt it too early. However, clearly engagement become an issue with respect to the adequacy of contributions – something that could be overcome by an increase in mandatory contribution limits – but more broadly around the retirement planning process. To this end, we are extremely disappointed to read reports about possible moves to shelve the pensions dashboard project.

5. How important is investment transparency to savers?

We are not convinced that investment transparency is of importance to the majority of savers, nor do we believe that it should be. We are instinctively uncomfortable with the idea of workplace pension scheme members making investment decisions based on complex financial information. Indeed, it is unclear to us what positive behaviour this initiative would drive other than providing members with even more complex information which could potentially drive disengagement.

However, we do believe that these savers should reasonably expect that the people tasked with investing their contributions should be able to understand the information provided to them by asset managers, and execute to that effect. To this end, it is important that IGCs, Trustees and Advisers are able to receive as much information as they can about the performance of funds in order to assess the value of these investments for the consumer.

6. If customers are unhappy with their providers’ costs and investment performance/strategy, are there barriers to them going elsewhere?

For the majority of savers who are automatically enrolled into a workplace scheme, the major barrier to them switching provider is the automatic enrolment policy itself. Unless an employer chooses to use another provider, by switching to another provider, an individual will automatically lose out on their employer contributions. However, this also assumes a level of engagement which is uncommon for the majority of workplace pension scheme savers.

We are relatively sympathetic to the argument that individuals should be able to choose their own automatic enrolment scheme rather than rely on the choice of their provider[8]. As we set out above, given the consolidation of schemes within the automatic enrolment market, the potential for consumer detriment is largely removed, These moves could drive engagement among savers whilst we would expect the majority to remain with their workplace provider.

7. Are Independent Governance Committees effective in driving value for money?

We believe that it is certainly the case that some IGCs put effective pressure on insurers in providing value for money, but we cannot argue with confidence that all of them do. In principle, we are supportive of the role of IGCs as representatives for savers and believe that they represent effective oversight for workplace pension schemes.

8. Do pension customers get value for money from financial advisers?

Yes. As we set out above, those who take advice are likely to accumulate more financial and pension wealth, supported by increased saving and investing equity assets, whilst those in retirement are likely to have more income, particularly at older ages[9]’. However, as above, value should not only be assessed through the performance of any given investment.

There are a number of tangible and intangible benefits to financial advice which are, unfortunately, not well understood by a large proportion of the population[10]. In particular, we strongly believe that the design of tailored, individual pathways for savers, assessment of the sustainability of their pensions, and more broadly, the piece of mind that financial advice can bring means that where it is appropriate, regulated financial advice is preferable to the purchase of mass market default products.

However, we concede that there have been recent examples where financial advisers have driven poor outcomes to savers. As we set out to the Committee previously, we strongly believe these to be outliers among the financial advice community where, in the main, the standard of regulation and professionalism has greatly improved over the last three decades[11].