Regulatory update: DP18 / 1 – effective competition in non-workplace pensions

Posted: 27th February 2018

BACKGROUND

In the 2013, the Office of Fair Trading (OFT) undertook a market study into Defined Contribution (DC) workplace pensions. The FCA sees parallels between the findings of this study and that of non-workplace pensions. The regulator wishes to determine whether competition is working well in the non-workplace pension market. The regulator published the discussion paper DP18 / 1 – ‘Effective competition in non-workplace pensions’ in February, and invite responses from the industry and consumers.

The FCA says that the paper “marks the beginning of our work to diagnose whether there is harm in this market by seeking to better understand the potential presence, nature, extent and cause of any harm.”

A non-workplace pension is defined as a private individual pension such as a Personal Pension, Stakeholder Pension, SIPP, FSAVCs, S32 buyout and Retirement Annuities Contracts (RACs).

The FCA has estimated that there are around £400bn assets under management (AUM) in non-workplace pensions, which is more than double the amount invested in contract-based DC workplace pensions. The FCA has noted that this is also a growing market, and serves a broad group of consumers who are saving for later life.

Key points from DP18 / 1

Demand-side weaknesses

The discussion paper explains why the FCA believes non-workplace pensions may share some of the features that were considered by the OFT to be preventing effective competition in workplace pensions.

The paper invites feedback on some of the factors that can impact demand-side weaknesses such as:

• Product complexity – most pensions are complicated and product performance may not become apparent for many years
• Lack of consumer engagement – behavioural biases may reduce consumer ability and motivation to engage in decisions related to their pension
• Propensity to switch – the levels of switching suggest there maybe barriers to consumers to identifying and freely moving to more competitive products
• Reliance on third parties (employers and advisers) – employers not sponsoring non-workplace pensions, instead, the consumer must select the provider, product and investment choice. The FCA aim to explore the differences and similarities between the two markets
• Fund choice and use of defaults – informal defaults may be operating in the market for non-workplace pensions

Charges

In the OFT study, reduced competition on charges in workplace pensions was identified, and in response, new measures were introduced which placed a cap on default fund charges for auto-enrolment schemes, placed a ban on differential charging (high charges to customers no longer contributing), and an independent audit on certain workplace schemes was carried out.

Similarly, the FCA discussion paper will focus on:

• Some of the charges that non-workplace pensions incur (for example, AMCs, paid-up and exit charges)
• Whether providers are competing on charges
• Whether there are barriers to consumers identifying and choosing from more competitive products

The FCA says that “in all markets, we want good value products and services that meet consumers’ needs. Where competition is working well, we will see firms winning business by making the best offer to consumers and delivering it. If firms can’t win business by offering better value, they have less reason to cut prices, improve quality or innovate. If there is weak competition at any level, it is typically the consumer who ends up paying as firms pass on higher costs”

REGULATORY NEXT STEPS

The FCA has given a deadline of the 27th April 2018 for responses, but the future roadmap is anticipated to be as follows:

• Prior to the deadline, the FCA will undertake qualitative research to examine the drivers and behaviours specific to non-workplace pension customers and whether these vary according to the product in which the customer is invested
• After considering the responses to the discussion paper, the FCA will issue a data collection request to the industry. This is likely to cover a) the charges that apply to non-workplace pensions; and b) whether and how value for money and fair outcomes for non-workplace pension customers are addressed by providers’ oversight arrangements
• Towards the end of the 2018, the FCA aims to publish a further paper which will provide feedback on the themes arising from the responses to the discussion paper and data collection. It will also include consultation proposals if the evidence we gather demonstrates harm to consumers

WHAT DOES THIS MEAN FOR FIRMS?

In the short term, firms should consider whether they should respond to the discussion paper by 27th April. It is likely that pension providers and advisory firms in the non-workplace pensions market will be keen to contribute their views.

Until the regulator’s work is concluded later this year, it is difficult to determine what the real impact of this might be. However, in the meantime, firms could be challenging themselves over:

• Pension providers of non-workplace pensions – whether products (new and existing) are competitively charged, are not unduly complex and there are no barriers to consumers who want to switch
• Pension advisory firms (distributors / advisers) – whether processes enable clients to receive the most competitive contract; whether part of an annual review or ad-hoc recommendation to switch to a more competitive contract, and whether the scope of service will facilitate the best customer outcomes (i.e. is not too restrictive)