Written evidence from Financial Conduct Authority (PCT0054)

Financial Conduct Authority (FCA) submission to the Work and Pensions Select Committee inquiry into pension costs and transparency

Executive Summary

This submission outlines the FCA’s role, remit and ongoing work as is relevant to the Work and Pensions Committee’s inquiry into pension costs and transparency. It also addresses several of the questions posed in the Committee’s call for evidence.

The pensions landscape has changed substantially over the last few years with millions more people saving for retirement due to Automatic Enrolment.  The pension freedoms have also changed the way consumers are able to access their pension pots, giving them more control over their retirement income. With greater control has come an increase in transfers from defined benefit (DB) pension funds into other pension arrangements including self-invested personal pensions (SIPPS) and other defined contribution (DC) schemes.  

The FCA is undertaking a broad programme of work focussed on those areas within our remit.  This also involves engagement with other organisations and regulators, such as the Pensions Regulator (TPR), the Prudential Regulation Authority (PRA), and the Pensions Advisory Service (TPAS).  We also work closely with the Government through HM Treasury and the Department for Work and Pensions (DWP). 

Role and remit

1.                 The FCA is the conduct regulator for more than 58,000 financial services firms and financial markets in the UK, and the prudential regulator for over 18,000 of those firms. 

2.                 The FCA’s overarching strategic objective, as set by Parliament, is to ensure that the relevant markets function well.  We have three operational objectives – to secure an appropriate degree of protection for consumers, to protect and enhance the integrity of the UK financial system, and to promote effective competition in the interests of consumers. 

3.                 The regulation of the pensions market is split between the FCA and TPR.

1. The FCA regulates personal pensions, both individual personal pensions and workplace personal pensions – these are predominantly DC schemes.
2. TPR is the regulator for occupational pension schemes (also called Company Pension Schemes). These pension schemes are trust-based, where scheme assets are held in a trust fund for the benefit of members. TPR regulates all DB pension schemes and DC occupational pension schemes. These include master trusts, which are multi-employer occupational pension schemes.

Overview

4.       In our Business Plan for 2018/19[1], we set out our priorities for the pensions and retirement income sector for the coming year which build upon our considerable work to date across the sector. We want to ensure that consumers are equipped to make good decisions to fund their retirement, including through appropriate advice or guidance, so they can access good quality, value-for-money retirement products.

5.       The decisions consumers make during their working life about saving for retirement and on how to take their retirement savings will influence their financial wellbeing in later life. Yet, many consumers feel unequipped to make these decisions confidently.

Retirement Outcomes Review

6. Our Retirement Outcomes Review[2] looked at how the retirement income market has evolved since the introductions of the pension freedoms in April 2015.  In June 2018, we published our Final Report[3] which found:

1. there was weak competition in the retirement income market, with low levels of switching as consumers were taking the path of least resistance. This meant more consumers were accepting drawdown from their current pension provider without shopping around,
2. one in three consumers who have gone into drawdown were unaware of where their money was invested,
3. some providers were ‘defaulting’ consumers into cash, or cash-like, assets when holding cash is highly unlikely to be suited for those consumers planning on drawing down their pot over a longer period,
4. consumers might pay too much in charges, with some drawdown charges being complex, opaque and hard to compare.  We found that charges for non-advised consumers vary considerably from 0.4% to 1.6% between providers and are, on average, higher than in accumulation where in some cases they are capped at 0.75%.
5. there is so far a lack in product innovation for mass-market consumers.

7. We published a Consultation Paper alongside our Final Report setting out a package of potential remedies to address the harms and emerging issues we have identified, and to put the market on a good footing for the future. These included remedies to protect consumers and help them make better choices before accessing their pension savings, at the point of making a decision, and throughout their retirement including:

1. Consulting on requirements that ‘wake-up’ packs must include a single page summary document (sometimes referred to as a ‘Pensions Passport’) and must be sent earlier in the process, from age 50,
2. Consulting on requirements that firms provide a summary of key information when a consumer enters drawdown, including a one year charge figure in pounds and pence,
3. Consulting on requirements that firms provide annual communications to their drawdown customers in all circumstances,
4. Seeking feedback on whether firms offering drawdown should provide a range of investment pathways to help non-advised consumers choose investment solutions that meet their needs and objectives,
5. Seeking feedback on whether firms should be prevented from defaulting drawdown consumers into cash, to make sure that investing in cash is an active decision.

Costs and transparency in pensions

8. Consumer confidence in pensions depends on a variety of factors, including full and clear disclosure of costs and the complexity of pension products.

9. Informed and engaged consumers are better able to make the choices that will determine their future income in retirement. However, given the inherent complexity of pension products, even significantly greater transparency around costs and charges is unlikely to majorly increase consumer engagement.

10.   This is why measures to empower consumers to engage more are required in addition to regulatory intervention. To date we have already intervened to protect unengaged and potentially vulnerable savers[4]. These include the charge cap on the default investment strategies of automatic enrolment schemes, the ban on differential charging in workplace pensions (whereby ex-employees were charged more than current employees), and the ban on exit charges.

11.   In 2015, we also made rules[5] requiring Independent Governance Committees (IGCs) to act on behalf of members of workplace personal pension schemes by challenging providers on the value for money of these schemes.

12.   As mentioned above, our work on the Retirement Outcomes Review is continuing and this is considering the issues we identified regarding costs and transparency.

Our current work

13.   Aside from the Retirement Outcomes Review, our work is continuing across a number of pensions areas:

14.   Transaction costs disclosure: In 2017, further to our obligations in the Pensions Act 2014, we created new rules[6] requiring asset managers to report on transaction costs and other charges to scheme governance bodies. We expect to consult on rules for the onward reporting of these disclosures to consumers before the end of this year.

15.   Asset Management Market Study[7]: We found weak price competition in several areas of the asset management industry and proposed a package of remedies to improve competition.

16.   This package includes measures to increase the transparency of costs and provide greater clarity around fund objectives and performance reporting. We are considering whether these remedies should be extended to unit-linked and with-profits products, and the most appropriate way for us to do this. We expect to communicate a view on this in the first half of 2019.

17.   Standardised reporting: Following our asset management market study, we set up the Institutional Disclosure Working Group (IDWG) to support consistent and standardised disclosure of costs and charges to institutional investors.

18.   In June this year, the IDWG made its recommendations to us[8]. The IDWG proposed standardised templates on cost disclosure for asset management services to institutional investors, as well as arrangements to ensure that the templates are maintained. We have welcomed these proposals.

19.   New rules for transfer advice: In March 2018, we published new rules and guidance on how advice should be provided to consumers considering giving up safeguarded pensions benefits, primarily for transfers from DB to DC pension schemes.[9]

20.   We now require all advice to be a personal recommendation and have set out requirements for an ‘appropriate pension transfer analysis’ (APTA) of the client’s options, and for a comparison of the value of benefits being given up with the cost of purchasing the same income in a DC environment. At the same time, we consulted[10] on additional proposals to improve further the quality of pension transfer advice, and included a discussion on whether to intervene in relation to charging structures.

21.   We will be issuing our response in the Autumn.  

22.   Quality of transfer advice: We continue to focus on the quality of pensions transfer advice. At the end of 2017, we sent a formal request for information to 45 firms in the third phase of our work. After receiving and analysing this information we carried out a number of visits to specific firms in the second quarter of 2018.

23.   We are currently planning the fourth phase of this work, which will involve writing to all regulated firms that hold the pension transfer permission to collect and analyse data. The follow-on work will allow us to build a detailed overview of firms’ practices across the entire UK market to get a representative picture of the quality of transfer advice.

24.   Non-workplace pensions: In February 2018, we published a discussion paper on effective competition in non-workplace pensions[11], seeking to understand the similarities and differences between non-workplace and workplace pensions to identify whether harms identified in workplace pensions also exist in non-workplace pensions.

25.   We have outlined potential harms arising from buyer-side weaknesses and competition on charges in the market. We are in the process of collecting data from industry and are undertaking consumer research to support our analysis of the market. We plan to publish a paper (aim Q1 2019) which will provide feedback on the themes arising from the responses to the discussion paper, consumer research and data collection.

26.   If the evidence demonstrates the existence of consumer harm, we will subsequently consult on proposals to remedy this.

27.   IGCs:  In 2016, we assessed the effectiveness of IGCs as part of a review of progress by firms, IGCs and trustees in remedying potentially poor value legacy workplace pension schemes. This review was conducted jointly with the DWP.

28. We are considering changes to our rules to require IGCs to report on their firms’ policies in relation to environmental, social and governance (ESG) factors, including climate change, how they take account of member concerns, and stewardship. We are also considering the need for independent governance beyond workplace pensions in accumulation, such as our proposed investment pathways for non-advised consumers entering drawdown. 

29. We previously took the decision to delay our review of IGCs.  This decision was based on initial indications that IGCs are operating sufficiently and competing demands on our resourcing, such as Brexit preparations.

30. We are considering whether to do a review of the effectiveness of IGCs as part of our business planning for 2019/2020.  This will take into account the existing work we are doing, our other priorities for that year and any further changes to the pensions landscape.

Our future work

31.   We are working with TPR to develop a joint strategy[12] for regulating the pensions and retirement income sector. We issued a call for input in March of this year, and ran a series of stakeholder events during April and May. In addition, we have received numerous written responses to the Call for Input, from a wide range of different stakeholders.

32.   Making sure pensions offer good value for money was one of the focus areas proposed in the Call for Input along with access to pensions, effective governance and secure funding, making sure pension savings are safe, and supporting good choices and outcomes for consumers and members.

33. We, and TPR, are reviewing this feedback and expect to publish our response later this year. It will set out our focus areas for action, and the initiatives we propose in each area.

Our Response to the Committee’s specific questions  

“Q1: Do higher-cost providers deliver higher performance, or simply eat into clients’ savings?” 

34. We have looked at the relationship between charges and fund performance in the Asset Management Market Study (2017)[13] and the Retirement Outcomes Review (2018)[14]. Following these reviews, we are putting in place several measures to help protect customers and to increase the transparency of charges.

35. The Asset Management Market Study found that “there is no clear relationship between charges and the gross performance of retail active funds in the UK” (p5). We undertook analysis of the relationship between the ongoing charges figure (OCF) of retail active funds in the UK and the performance generated, both gross and net of fees. We did not find a clear linear relationship between fund charges and gross performance generated by the fund manager.

36. We also found that most funds cluster within a narrow price range but often deliver very different levels of return. Where there was price variation, the majority of results showed no statistically significant correlation between price and performance. We found some evidence that more expensive active funds underperformed cheaper active funds when considered net of fees. These were some of the pieces of evidence which led us to conclude that we had found weak price competition in several areas of the asset management industry.

37. We are implementing a package of remedies to address the concerns identified in the Asset Management Market Study. This includes strengthening the duty on fund managers to act in the best interest of investors, clarifying fund objectives, performance and the use of benchmarks and work on the transparency of fees and charges.

38. We have also launched further work on investment consultants (with a likely impact on pension savers specifically) and investment platforms (with a likely impact on retail investors specifically).  

39. The Retirement Outcomes Review looked at investments made by non-advised drawdown customers, and their associated total charges (not just fund charges) and Sharpe ratios[15] to understand whether the difference in charges could be explained by consumers getting better investment returns.

40. This found that higher charges were weakly associated with higher performance. The Review concluded that “the large differences in charges between providers cannot be explained by performance”. “Consistent with the findings of the FCA Asset Management Market Study the evidence does not show a clear relationship between charges and performance – it is not clear that you get better returns in exchange for higher fees” (p55).

41. It should be noted that our analysis did not explore whether higher provider charges led to better non-financial outcomes for customers. Our consumer research found that customers said they also saw ease of access, customer service and risk as important factors for choosing a provider.

42. We are implementing a package of remedies to address the concerns identified in the Retirement Outcomes Review. We discuss this further in response to question 3.

43. As part of this, we are also working closely with the Money Advice Service (MAS) and the Association of British Insurers (ABI) to develop a drawdown comparator tool to help consumers shop around and switch providers. We commissioned a behavioural experiment[16] to assess the effectiveness of different ways to summarise the cost of pension products to help consumers identify which was the most cost-effective option for them.

44. In our Retirement Outcomes Review consultation paper, we invited views on the proposition that providers should offer three ready-made drawdown investment solutions (‘investment pathways’) with simple choices[17].

45. We would expect firms to develop investment pathways with consumers’ best interests in mind, including appropriate charge structures and levels. We believe firms should challenge themselves on the level of charges and use 0.75% on default arrangements in accumulation as a point of reference. Should we decide to progress with investment pathways, we also plan to review the charges being applied to them one year after their implementation. If the evidence we gather suggests it is necessary, at that point we will be highly likely to move towards a cap.

46. In February 2018, we published a discussion paper marking the beginning of our work to diagnose whether there is harm in the non-workplace pension market. This paper sought the views and evidence of consumer and industry representatives about the factors that influence the behaviours of consumers and providers and whether the current market dynamics ensure fair outcomes for consumers.

47. We are focussing particularly on potential harms arising from demand-side weaknesses and charge related issues (harms previously identified and addressed in the workplace pensions market). If the evidence demonstrates the existence of consumer harm, we will consult on proposals to remedy this.

48. In addition to the planned measures noted above, we have carried out thematic supervision work[18] to assess how insurers are treating their long-standing customers in closed books, including pension customers.

49. This work considered whether insurers reviewed products (including charges) to ensure they remained capable of delivering against the reasonable expectations of customers. We found that firms did not review their closed-book products or where they did, the reviews were inadequate.

50. To address this, we issued guidance[19] for firms setting out our expectations. Since then firms have informed us that they have made improvements to their product review processes. The guidance also set out our expectations for customer communications, including communication of charges. This should help customers to understand better what they are being charged and why.

“Q3: What is the relative importance of empowering consumers or regulating providers?” 

51. We recognise there are ways to increase demand-side competitive pressure by empowering consumers. However, this is only part of the solution. A combination of measures to empower consumers and appropriate regulatory intervention is required to protect consumers from poor outcomes.

52. For example, when consumers face complex decisions they may not shop around for the best deal. We know that 94% of consumers who accessed their pensions pots without taking advice accepted the drawdown option offered by their pension provider. However, our Retirement Outcome Review analysis found that the annual charges of a fund for non-advised consumers vary considerably from 0.4% to 1.6% between providers. By switching from a higher cost provider to a lower cost provider, consumers could increase their annual income by 13%.

53. Our Retirement Outcome Review Consultation Paper[20] set out a remedy package which aims to address the harms and emerging issues we have identified, and to put the market on a good footing for the future. The package included both measures to address the weak competitive pressure and low levels of consumer engagement, and to protect consumers from poor outcomes.

54. To address the weak competitive pressure and lack of engagement, we are taking steps to improve the effectiveness of consumer communications and ensure consumers can access the support and guidance they need. These include changes to the ‘wake-up packs’ so that they reach consumers at the right time to inform their decisions. They also include improvements to Key Features Illustrations, which consumers receive when they enter into a new pensions product, to make them more engaging and easier to understand. We are also seeking feedback from stakeholders on proposals that providers should offer ready-made drawdown investment solutions (see para 33).

“Q4: How can savers be encouraged to engage with their savings?” 

55. Consumer engagement with pension savings is notoriously weak. Indeed, automatic enrolment has made use of consumer inertia to bring millions of consumers newly into pension saving.

56. The FCA’s Financial Lives Survey 2017[21] revealed that over 6m UK adults are contributing to an employer-arranged pension and do not know whether it is a DB or DC pension. Further, over 13m UK adults have a DC pension and have never reviewed where it is invested.[22]

57. Consumers who have been engaged throughout their savings journey are better prepared for decisions at retirement – and are less likely to face unpleasant surprises. Engaged consumers should already know what income they can expect in retirement, and will have actively considered the amount that they save.

58. While the FCA wants to see greater consumer engagement, we think it is important to be realistic about what can be achieved. Our Financial Lives Survey shows that just 35% have given a great deal of thought as to how they will manage in retirement. Our Retirement Outcome Review also found that many consumers do not make use of the available information. Therefore, we cannot focus on engagement alone to solve the potential harms in this market.
     
59. There is also a potential risk that engaged consumers will not necessarily make choices that are in their best interests or that drive effective competition. For example, savers constantly monitoring the performance of their investments may sell when fund prices drop, and buy when they rise. Savers may also be tempted into transferring into investments that are risky and not suitable for them, or consumers may be biased towards consuming now rather than saving for the distant future. They may also struggle to compare options effectively.

60. It is therefore important that information is presented in the right way and in the right context, otherwise consumers may engage but potentially make choices that do not meet their needs.
    
61. Increasing engagement depends on the concerted efforts of the pensions industry, employers, advisers, MAS, the future Single Financial Guidance Body, Government, TPR and the FCA. Our role as a regulator is focused on the conduct of firms providing pensions, including how they communicate with consumers about their pension savings.

62. To encourage consumer engagement, we want to see clear, actionable and timely communications, tailored to the decisions that savers need to make. Our rules on the disclosure of information prescribe what and how information must be disclosed to consumers. We also set the assumptions that must be used when firms make projections of expected income in retirement so that this is done in a consistent way.
     
63. While our rules require certain information, they do not prevent greater clarity and consistency. We welcome industry initiatives, such as the work led by the ABI over the past two years to improve the clarity of pensions communications. ABI members have already made changes to their communications, following principles set out in the ABI’s guide on ‘Making Retirement Choices Clear.’[23] 

64. We described the pensions dashboard as a consumer-friendly digital interface that enables consumers to view information about all their lifetime pension savings (including the state pension) in one place, at any time. We explained then, and continue to believe, that a dashboard of this nature has the potential to drive genuine consumer benefits by allowing consumers to take greater control of their retirement planning.

65. We also welcome industry innovations that encourage consumers to engage, including the increasing availability of online tools and mobile apps. We note international developments, such as the ‘Save More Tomorrow’ initiative in the US.

66. This initiative makes use of behavioural biases to encourage pension saving by signing employees up to a plan which allocates a portion of future salary increases towards their retirement savings. This approach harnesses the power of inertia so that once employees have been enrolled in the plan few opt out.

67. We have also made extensive use of the lessons learned from behavioral economics in the design of our interventions. This is summarised in our Occasional Paper on applying behavioral economics at the FCA[24].
     
68. Consumers need a holistic picture of their pension benefits to make better decisions, both while saving and when taking their retirement income. Our Retirement Income Market Study[25] and the Financial Advice Market Review[26] (FAMR) recommended that government champion and play a convening role in industry’s development of a pensions dashboard.

69. For non-advised consumers entering drawdown, we have recently invited views on measures specifically designed to encourage engagement. As mentioned in our response to Q1, in our Retirement Outcomes Review consultation paper we have proposed for discussion that firms offering drawdown to non-advised consumers should provide a range of investment pathways to help consumers choose investment solutions that meet their needs and objectives in drawdown. 

70. Consumers with fairly straightforward needs would be encouraged to make a choice between a small number of pathways with broad standardised objectives[27]. We have sought feedback from stakeholders on how these objectives are best presented to consumers and we are also planning research with consumers.

“Q5: How important is investment transparency to savers?”

71. We believe that it is clearly in savers’ interest that they are given full, clear, fair, and not misleading information about financial products. This allows them to make more informed decisions about what they are buying and the consequences of their purchase.

72. By regulating the information given to savers through our disclosure regime we seek not only to ensure savers are informed but help them make effective use of the information provided. Our regime was originally conceived to meet two objectives:
     

1. to give consumers the information they need about a product and its charges so that they can make informed decisions about whether or not to buy; and
2. to ensure that the information is presented in a format and at a time that helps consumers to make comparisons between products and providers.
    

73. We recognise, however, that information disclosures alone do not necessarily empower savers. Our work on behavioural economics has clearly shown that information can overwhelm, confuse, distract or even deter savers from making effective choices if presented in a way that they struggle to engage with. There are a few contributing factors:

1. behavioural biases, low levels of financial literacy and the complexity of some financial services and products can limit people’s ability to take appropriate action;
2. firms tend to use financial and legal jargon, which can make the materials they produce lengthy and impenetrable for the consumer and;
3. in some firms, marketing material is much more consumer focused than other consumer communications.

74. We are, however, committed to driving improvements in the effectiveness of the information savers receive.

75. In June 2015, we published a discussion paper on Smarter Consumer Communications[28]. This marked the launch of our Smarter Consumer Communications initiative and started a debate around how the FCA, industry, consumer groups and other stakeholders can work together to deliver information to savers in more effective ways.

76. In October 2015, we consulted on proposals to remove ineffective disclosure requirements from our Handbook[29]. In October 2016 we confirmed that, based on consultation feedback, we would remove ineffective disclosure requirements from our Handbook and the guidance around this disclosure.

77. Some parts of our disclosure regime reflect legislative requirements, notably the Directive relating to the Undertakings for Collective Investment in Transferable Securities (UCITS), the Markets in Financial Instruments Directive (MiFID), the Packaged Retail and Insurance-based Investment Products (PRIIPs) Regulation, and the Pensions Act 2014 (see ‘our current work’).

“Q6: If customers are unhappy with their providers’ costs and investment performance/strategy, are there barriers to them going elsewhere?”

78. There are numerous potential barriers to consumers switching pensions providers in workplace and non-workplace pensions both in the accumulation and decumulation stages.

79. As shown in our Retirement Outcome Review, many consumers do not engage either at the point of decision or on an ongoing basis. One in three consumers who had gone into drawdown recently were unaware of where their money was invested.
     
80. Secondly, even where consumers do engage, information on products can be hard to understand and compare. For example, there are significant differences between providers in the format and presentation of information in Key Features Illustrations (as we referred to in answer to question 3 above) - with some presenting this on a real basis and some nominal[30]. This makes comparing across providers on a like-for-like basis very difficult.

81. However, even once a consumer has decided to switch there can be supply side barriers to this switching. These include exit fees, or unwieldy or time-consuming processes, which can act to prevent or deter consumers from taking their business elsewhere. The loss of employer contributions may, for example, discourage members of workplace pension schemes from switching providers. There may also be relatively few ways for consumers to compare products with complex charging structures, such as income drawdown products or non-workplace personal pensions. 
     
82. While the loss of employer contributions does not act as a barrier to switching non-workplace pensions, switching levels suggest there may be other barriers to consumers moving freely. Our Financial Lives Survey 2017[31] showed that of all UK adults with DC pensions, only one in five (18%) have ever reviewed where their pension is invested. Those who only have an employer-arranged DC pension (workplace) are less likely (13%) to have done this than those who only have a DC pension they set up themselves (non-workplace) (37%) or those with both types of DC pension (33%). 
83. Focusing on the previous two years, we find that 85% of all UK adults with a DC pension had not reviewed where their pension had been invested, 10% had done so but made no change, while 5% had done so and had made a change in switching investments with pensions, but not pensions providers.
84. Several factors may be contributing to this, for example, our Thematic Review[32] of the fair treatment of long-standing customers in the life insurance sector found that exit charges often apply to life insurance policies. Consumers may also choose to stay with their current providers if they are satisfied with their performance.
85. In view of the challenges consumers face, we want industry to take more responsibility for improving the switching process, particularly where the industry is well placed to understand how the switching process works and how it can be improved. For example, in February 2016, the industry established the Transfers and Re-registration Industry Group which is currently taking forward an initiative to improve the switching process and reduce transfer times for customers, investments, assets and entitlements.

86. We expect this to initially provide:
     

1.            a minimum standard for transfer and re-registration times through the introduction of a maximum timescale for each step in the switching process and;
2.            clear customer communications from the recipient provider at the outset of the switching process detailing the transfer process, timelines and a point of contact if they have any questions or wish to complain.

87. A further positive step would be for the industry to publish data on transfer times so consumers and third parties can compare platform performance and incentivise platforms to make improvements.

88. We are generally supportive of the Transfers and Re-registration Industry Group’s initiative and expect industry to implement changes in these three areas by the time we publish the final Investment Platform Market Study[33] report in Quarter 1 2019. But we are also consulting on whether and how the FCA can reinforce the initiative, and we have made it clear that if we don’t see progress by the time we publish the final report, we will consider the merits of further FCA action in this area.

89. In addition, as part of our Platforms Market Study we are examining whether switching costs can be reduced through banning exit fees. We will also consider how to improve switching between share classes and will clarify our expectations around charging for the adviser’s role in switching.

90. In some instances, barriers to switching (such as exit fees) may require a regulatory solution to correct. For example, in November 2016 we capped early exit charges for consumers eligible to access the government’s pension reforms from age 55. The 1% cap on early exit charges for existing pensions, and the 0% cap for new contracts, means that current and future savers will not be deterred by these charges from taking, converting or transferring pension benefits.
     
91. Improving the switching process and reducing switching costs is an ongoing focus for the FCA. We are examining through our work on effective competition in non-workplace pensions[34] if and how consumers know whether they would be better off switching funds, products or providers, and whether this knowledge informs their actions.

92. As part of this work, to determine the current prevalence and impact of exit charges on non-workplace pensions, we are gathering further data from the industry. If our work identifies consumer harm, we will consider further steps to better enable switching.

“Q7: Are Independent Governance Committees effective in driving value for money?” 

93. IGCs were established under FCA rules in April 2015, at the same time as the roll out of automatic enrolment, to drive value for money in workplace personal pension schemes. These schemes include legacy schemes and schemes used by employers for automatic enrolment. They are typically provided by insurers for many different employers at once, with contracts directly between the member and the insurer.

94. We required IGCs to be established because of the very weak demand side of the market for workplace pension schemes. Few members are actively engaged and the employer is responsible for selecting the provider of the scheme. IGCs act on behalf of members to challenge providers on the value for money of their schemes.
     
95. All providers of workplace personal pension schemes must, under FCA rules, have either an IGC or a Governance Advisory Arrangement (GAA).[35] The IGC (or GAA – references to IGCs should be taken to refer to GAAs also) must act independently of the provider and (like trustees) solely in the interests of members in assessing value for money. IGCs raise concerns directly with the firm’s Board and may escalate concerns to us if they are not satisfied with the firm’s response.

96. In 2016, we assessed the effectiveness of IGCs as part of a review of progress by firms, IGCs and trustees in remedying potentially poor value legacy workplace pension schemes. This review was conducted jointly with the DWP.

97. The review of progress followed an Office of Fair Trading (OFT) market study that had identified around £30bn of assets in workplace pension schemes with charges that could be more than 1% and that were therefore at risk of being poor value for money.

98. A subsequent independent industry audit confirmed £26bn of assets were potentially at risk. IGCs were tasked with agreeing remedial actions with providers in order to improve value for money.
     
99. This was an early and important test of the IGC regime. At the time of our review, we found that action had already been taken in respect of £20bn of assets to ensure that costs and charges could not exceed 1%. Following further work, we announced in December 2017 that costs and charges had been reduced to 1% or less on a further £4.9bn of pension assets. The remaining £0.9bn assets were mainly in schemes with guarantees or other benefits that might justify higher charges. In some cases, IGCs were continuing to challenge providers on whether these benefits justified the higher charges.
     
100.       Overall, we found that IGCs had been generally effective in agreeing robust and timely actions to address poor value in relation to the remit they were given. Most IGCs had been effective in how they had challenged providers on behalf of members. However, we found that some IGCs could have been more proactive and rigorous in driving providers to take robust action more quickly. We also had concerns that, in a small number of instances, the independence of the IGC may have been compromised due to its composition and/or a strong senior management presence at meetings.
      
101.       Given the analysis already undertaken, we decided to defer a planned full review of IGC effectiveness so that we could focus on other supervisory priorities. Since then, we have engaged with other organisations doing work in this area[36].

102.       We have work currently underway on IGCs in the context of recommendations from the Law Commission that IGCs should report on the policies of firms in relation to Environmental, Social and Governance (ESG) factors, how they take members’ concerns into account, and stewardship.[37] The Law Commission made these recommendations to increase transparency for consumers on these matters.

103.       We also have wider work on the potential need for independent governance in other areas, such as the investment pathways we have proposed for non-advised customers entering drawdown, which could involve an extension of the IGC regime.

104.       Ultimately the firm providing workplace personal pensions is responsible for the costs and charges of its products, and for negotiating with third party providers of funds on the investment costs that members bear. IGCs and any other independent governance bodies must provide effective challenge and ongoing oversight on behalf of consumers to add value.

“Q8: Do pension customers get value for money from financial advisers?”

105.       It is challenging to measure value for money for pensions advice. It is highly subjective and differs from one consumer to the next. Any measure also needs to consider a very long-term horizon.

106.       The Government’s pension freedoms have changed the pensions market and as a result the pensions advice market has evolved. Pension freedoms can be accessed by anyone who is a member of a DC scheme whereas in previous decades, advice on pensions tended to be accessed only by high net-worth individuals. Now more people are having to make complex decisions about how to access their pension savings it is important that advice helps them make sense of the choices they face.  For those considering accessing their DC pension pot, regulated advice is a mandatory requirement if their savings exceed £30,000.

107.       Since the start of the pension freedoms, we have seen substantial shifts away from annuities and towards drawdown. Prior to the pension freedoms, over 90% of pension savings were used to buy annuities.[38] Following the pension freedoms, twice as many pots have been used for drawdown than to buy an annuity[39] with 63% of drawdown sales made with advice.[40] However, we do not have data to show whether consumers consider the advice they have been given to be value for money, or whether it provides consumers with more favourable financial outcomes.
      
108.       Following the pension freedoms, the FCA has undertaken a number of pieces of work, which have focused on the quality of and access to advice. In this context, we have prioritised work in areas where we have seen the most risk of harm to consumers, e.g. DB transfers. (See “Our current work”).
      

September 2018