Written evidence from Investment Life Assurance Group (PCT0025)

 

 

  1. The Investment & Life Assurance Group (ILAG) is a representative body, with members from across the Life Assurance and Wealth Management Industries.

 

  1. ILAG members openly share and develop their practical experiences and expertise, applying this practitioner knowledge to the development of their businesses, both individually and collectively, for the benefit of members and their customers.

 

  1. ILAG is run by practitioners for practitioners, whether by engagement with industry associated bodies or through active consultation.

 

  1. A list of ILAG members is at the end of this submission.

 

General comments

 

  1. The wide-ranging questions within the Inquiry are encouraging, as this allows a broader debate, but the complexity of the subject means the responses are likely to be equally complex and wide-ranging.

 

  1. Our members strive to provide products and services that deliver good value and outcomes.  These products are provided within the current regulatory and taxation environments.  We agree that a top-down review of the current pension system is healthy, with the opportunity to play a key part in helping to get more people saving.

 

  1. It is our view that the 4-week turnaround on such broad questions, especially over the holiday season, was always going to make it challenging for there to be a fully considered response from the industry.

 

  1. In addition, this Inquiry comes at a time when a large number of other initiatives, reviews and consultations in the area of pensions, savings and investment are underway, as noted in the Inquiry’s background notes.  We urge the WPC, the regulators and Government, to be cognizant of the current pace and spectrum of change, especially if greater legislative reform is anticipated as a result of this Inquiry.

 

  1. This aside, the WPC’s engagement is very much welcomed and ILAG, on behalf of its members, is eager to become involved.

 

 

Consultation questions

 

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

 

  1. In its Report into customer behaviour, following the introduction of pension freedoms, the FCA states there is no evidential link between charges and performance. The WPC will no doubt consider FCA’s findings when arriving at its conclusions.

 

  1. Although the question itself appears simple, it necessitates a more complex answer.

 

  1. Clearly, a higher charge can erode performance and fund value, but for some customers a higher charge is the result of seeking, and ensuring, a more effective match between their preference for risk and volatility and their objectives.

 

  1. Equally, the ultimate choice of provider (and, therefore, cost) could be connected with ease of access, brand recognition, and the perception of security.

 

  1. In some cases, it may be that higher charges result, in part, from increased costs associated with a provider seeking to deliver greater customer support, technology and/or additional product features or protections, compared to others.  This is why the transparency of the offering is key.

 

  1. Meeting the needs of a certain markets, or sectors, can also result in higher charges. For example, consumers on lower incomes, or other people with greater financial pressure, may choose, or need, to miss contributions from time to time.  A more volatile contribution base can create additional administration costs for companies and providers, which may, ultimately, have an impact on charges. 

 

  1. Nevertheless, we agree that the topic of cost versus performance is important to examine.  We are unclear if input about charges for advice and funds is also within scope, as the WPC seems to focus on product charges alone.

 

  1. How, and where, consumers choose to invest their pension savings, and what advice they take, will determine their overall charge experience, and their financial outcome. It is essential to understand the difference between active and passive investments, and the impact of these strategies on the overall costs, compared to what the customer is seeking to achieve.

 

Is the Government doing enough to ensure that workplace pension savers get value for money?

 

  1. We acknowledge the good progress on workplace savings through auto-enrolment.

 

  1. Nevertheless, this remains a largely one dimensional area: an employee can have limited choice and may still not engage with the concept of saving.

 

  1. More work is needed to ensure savers remain engaged with their workplace savings, and, where possible, that they continue to make active choices about their goals. Not only how much they save, but how this connects with debt management and wider savings potential.

 

  1. Promoting the agenda for stronger access to workplace (and other) guidance, dashboards and advice, and addressing the causes of inertia, which result in pension savings remaining with existing providers, are clearly initiatives to be pursued.

 

  1. There is an increasing risk that workplace pension discussions do not fully correlate with the rapidly expanding employment market which exists outside the auto-enrolment and ‘conventional’ workplace environment (for example, self-employed, gig-economy and digital nomads).

 

  1. The perception of ‘value for money’ is highly subjective and the current regulatory environment, rightly and fairly, has a particular focus on charges.  Yet, an individual who has a higher charging pension plan but is with their preferred provider, and is content with their investment return, is likely to be happier in a ‘value for money’ sense than someone who is in the lowest charging product but has seen poorer investment performance and experienced ‘average’ customer service. 

 

  1. The debate over what constitutes good value for money will continue. It is also influenced by external factors.  We are, and for a significant period have been, in a low interest rate environment, where ’risk-free’ returns have not kept pace with inflation.  Ignoring product and service charges, the evaluation of ‘value for money’ cannot take place without the consideration of risk. 

 

  1. We suggest Government also considers:

 

      its role in supporting and encouraging the pensions market, considering the securities it issues, including longevity bonds.

      its continued support for the pension dashboard, so that pension savers and their advisers have a single view of all their pension provisions and can make sound decisions for the future, including pension consolidation which could help reduce charges.

 

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

 

  1. We assume the regulatory aspect of this question refers to the conduct regulation of providers, given prudential regulation is necessary to ensure providers can meet their financial obligations.

 

  1. Empowering consumers and regulating providers are both required, but educating and empowering consumers, to engender a vibrant and engaging savings market, is the optimum policy outcome and should be vigorously pursued.

 

  1. The objective should be to increase consumer knowledge exponentially to empower them, create more consumer-motivated actions, and allow them to make better and more timely judgments about the financial products and services they require.

 

  1. It is unlikely that the need for active industry regulation will diminish given the continued risk of potential consumer detriment. Threats from scammers and others exploiting regulatory 'blind spots', and as a result of new or still developing product areas where the longer term challenges may be less well tested will persist.  Governmental changes such as pension freedoms have also presented risks, alongside the positive aspects, of which the industry and regulators must be mindful.

 

  1. Significant segments of UK consumers do not engage with financial planning services, and, until this gap is addressed, ’default’ protections must remain in place to ensure they do not suffer materially because of passivity or disengagement or inertia.

 

  1. Affordable, accessible and reliable advice and information services must be available, alongside empowering consumers and regulating providers to ensure more people take steps to secure their financial futures.

 

How can savers be encouraged to engage with their savings?

 

  1. Periods of stability in the pensions and savings environment are essential. Whilst many changes are positive and necessary, constant change causes confusion and disengagement.

 

  1. Reducing unnecessary complexity, whether driven by products, taxation, legislation or regulation, would go a long way to prevent customers ‘giving up’ at an early stage in their planning.

 

  1. There must be a major push in financial awareness and financial health.  Depending on the circumstances, complex concepts that are perceived to deal with a ‘far-away’ future need to be replaced by easy access solutions – sought out by consumers who have been armed with a greater understanding of the value of financial planning. 

 

  1. Sustained and federated action across key stakeholders, education, employers, Single Financial Guidance Body, distributors and providers is vital.

 

  1. Innovations, such as the pensions dashboard and the ‘mid-life MOT’ from John Cridland’s report into the State Pension Age, are important concepts that should continue to be explored and championed.

 

  1. We strongly support the development of the Dashboard and note the recent concerns about the lack of commitment to it by the Department for Work and Pensions, most recently the significant comments from Phil Loney in Royal London’s Interim Results (Link to Interim Results Announcement).

 

  1. Overt incentives should also be considered.  For example, aside from taxation benefits, the extension of the recently introduced concept allowing people to access their pension fund early to pay for retirement advice could apply earlier to help access wider financial advice.

 

  1. In addition, product innovation may allow for discounts as a result of responsible actions taken by consumers that help a family have a healthier financial lifestyle (in a similar way to how health and other insurances now take account of healthy living).

 

  1. Increasing awareness of the challenges associated with social care must also feature in this debate.

 

How important is investment transparency to savers?

 

  1. Investment transparency is very important, and should be simple to compare, so customers able to judge performance and value consistently, rather than just how it is made up or how it works.  Given the wide variety of investment models and options, and customer risk profiles, this is not a simple area.

 

  1. Guidance, especially advice, services play an important role in customer education and engagement to aid understanding of what they have and whether their savings are working for them.

 

  1. Ultimately, it is likely to be the investment return, rather than the product charges or features, that will determine success and satisfaction for the customer.

 

  1. Understanding the balance between risk and reward is not one that most customers are eager to explore in the detail required.  It is not possible to achieve a high return coupled with a very low risk to capital.

 

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

 

  1. It must be acknowledged that many people, even after having been provided with all the relevant information, aren’t fully aware of costs and the impact of costs on their pension, nor do they have sufficient understanding to choose an appropriate investment strategy without help.

 

  1. Nevertheless, for those that are aware, and are unhappy, barriers to moving include inertia, lack of easy access to advice, and a perception that they are stuck with their employer’s scheme until they leave.

 

  1. Advice and information services play an important role in monitoring whether products are performing and help when moving customers to better value solutions.

 

Are Independent Governance Committees effective in driving value for money?

 

  1. It is too early to make draw conclusions about the effectiveness of Independent Governance Committees, but, over time, the performance of longstanding DC (and DB) pensions will be good indicators. 

 

  1. The current CMA review into the pensions consultancy industry appears to suggest that more needs to be done to improve effectiveness.  

 

  1. Trustees may not be experts and, therefore reliant on professionals whose wider remit may dilute the independence of the committee.

 

Do pension customers get value for money from financial advisers?

 

  1. Yes, as a general rule we believe they do.  It should be acknowledged that financial advice also performs a vital role beyond its basic remit, allowing the customer to transfer responsibility and risk to a professional, and have some recourse if things go wrong. It also provides access to products and services of which many consumers will not be aware, to better meet their needs, preferences and aspirations.

 

  1. Engaging with a financial adviser can also result in a long-standing relationship that ensures the customer’s evolving financial needs are identified and catered for.

 

  1. Advice is not always needed for every financial decision but, equally, should not be seen as a luxury for the few, especially when there is a good evidential base of customers shown to be materially better off as a result of taking advice (FCA’s post-pension freedoms impact analysis, Institute for Intergenerational Studies, Unbiased.com).

 

  1. Investment in technology, workplace propositions and ensuring data can be easily accessed are all important steps in creating a more modern, vibrant and affordable advice market. This would ensure more consumers can, and will want to, buy the expertise and protection of a financial advice. Regulatory changes should not make it harder for people to access, and fund, good financial advice.

 

  1. The introduction of auto-enrolment has changed the pensions landscape, with the addition of 8 to 9 million new pension savers. Over the next 20 years many of these new savers will retire. All of them will have different advice requirements to the current cohort of retirees, and many will have more and multiple arrangements in a way that previous generations of employees did not .

 

  1. The size of the adviser market is not increasing, and alternative technological solutions will not necessarily translate to lower costs for consumers.

 

  1. The longevity of new solutions and services is vital to deliver good outcomes for existing and future pension consumers. Continuity of these solutions and services between successive regimes is essential.

 

September 2018