FCA finds annuity market not working for consumers
The Financial Conduct Authority (FCA) has published a review of the annuity market which has found that people approaching retirement are poorly served when it comes to converting their pension savings into retirement income.
As a consequence, the FCA has launched a study of competition in the annuity market, from which it expects to recommend changes that will shake up the market.
The main challenges thrown up by the review include the familiar issue with getting people to shop around at retirement – the review found that 60% of consumers do not switch providers when they buy an annuity and that of these, 80%, could get a better retirement income by shopping round. However, the review also highlighted that even when shopping around, people are frequently confronted with poor choice in the annuity market, something that is even more marked for those with small pension pots (ie less than £5,000), for whom the FCA found there is virtually no market whatsoever. The review also indicated that consumers do not appreciate the range and complexity of the decisions they need to make at retirement or the risks associated with not exercising the various options available to them – for example only around 5% of all annuity sales in 2012 were of escalating annuities.
The FCA plans to publish the interim findings of the new study this summer, and set out its full remedial recommendations within a year, which could entail rule changes designed to stimulate competition in the market or to constrain the behaviour of certain firms.
During 2013, the FCA also reviewed 13 annuity comparison websites and, finding scope for improvement in all of them, has both provided feedback to the firms concerned to act on and also published a consultation that includes proposed guidance on financial promotions. This consultation closes on 14 March.
Following the FCA announcement, pensions minister Steve Webb is reported to have said that the Government would consider any recommendations to improve the way the annuity market operates – including giving new annuitants a 12 month “cooling off” period in which they could change their mind if they find a better deal after signing up to a pension; or making it a requirement that retirees buy their annuity from a different company to the one with which they built up their pension pot.
Comment
Ensuring better annuity outcomes is going to be a hard nut to crack. Websites can be improved and annuity advisory processes can be made more customer-friendly, but so long as annuity providers are allowed freedom in the marketplace (subject to fair and transparent processes) and the annuity decision is driven by the individual there will always be those who could have done better.
At some point Government might have to decide to impose a default annuitisation process, but such a step will bring its own challenges.
Employers’ auto-enrolment duty to be removed in four areas
The Department for Work and Pensions (DWP) has published a further response to a consultation on technical changes to the auto-enrolment rules dealing in particular with proposed changes to the employer duty to auto-enrol certain workers into qualifying pension schemes.
The latest response says that a strong case has been made for Government to permit employers not to enrol workers who:
- Have tax-protected status for existing pension savings (with the onus quite possibly being on the individual to make the employer aware of their status)
- Are on the brink of leaving employment (for example in a notice period), although there are still issues to be resolved around both practicalities and fairness to the individual
- Have given notice of imminent retirement (with the notice period spanning their automatic enrolment or re-enrolment date); or
- Have recently cancelled membership after being contract-joined (but then would still have to be subjected to the formal auto-enrolment process when they first become eligible jobholders)
The DWP intends to develop proposals for workable exceptions for these categories of employee.
The response also discusses some cases in which the DWP has decided that an exception is unnecessary. Specific mention is made of workers in long-term serious ill-health or suffering from a terminal illness (given in particular the challenge of defining the scope of the exception and the risk of interfering with survivor rights), non-UK residents (given the available workarounds and risk of excluding workers actually in scope) and particular categories of waged/salaried workers who either have schedule D tax status or a certified exemption from payroll taxation.
Final proposals and draft regulations will be made available for consultation in due course.
The original consultation was launched back in March 2013 (see Pensions Bulletin 2013/14) with a view to improving how auto-enrolment works in practice. In October 2013, the DWP made regulations confirming a number of the improvements (see Pensions Bulletin 2013/43)
Comment
The Government remains convinced that in most cases, exercising the right to opt out remains the most suitable option for workers who do not wish to remain in pension saving. While the introduction of an exception in the four specific cases being considered will be welcome it will add further complexity to the employer duty. It may be necessary to ensure that any inadvertent enrolment that falls outside the revised employer duty remains subject to the one-month opting out period. For example, an inability to exercise this opt out where tax protection is the issue could have adverse consequences for the affected individual.
Government moves further amendments to the Pensions Bill
The Government has tabled a number of amendments to the Pensions Bill to be considered at Report Stage in the House of Lords, which has been scheduled for 24 and 26 February. This is realistically the last opportunity for the Bill to be adjusted before it goes on to its final stages in what has been a long parliamentary process.
The Government amendments cover the following:
- Employer override power – the clause preventing the use of the power for certain schemes is re-expressed so that additionally it prevents the power being used to make amendments that apply to a member who is a “protected person” in relation to a scheme. This follows the Government’s announcement to that effect on 12 February (see Pensions Bulletin 2014/06)
- Auto-enrolment – the clause enabling regulations to set out exceptions from the employer auto-enrolment duty (see article above) is constrained so that the regulations may not provide for an exception for employers of a particular size. This has been put in because of concerns that the regulations could be used to turn off the auto-enrolment duty for smaller employers who have yet to reach their staging date
- Power to restrict charges or impose requirements – this clause is extended in scope to potentially cover all pension schemes by removing the phrase “work-based”. The Government’s plans to use this power remain deferred until at least April 2015 (see Pensions Bulletin 2014/03)
- Pension Protection Fund compensation cap – further adjustments are made to the provisions introducing a service-related cap to allow for a pension credit following divorce and PPF compensation in respect of benefits under two or more connected schemes
Pensions Ombudsman sets out approach to liberation cases
The Pensions Ombudsman has set out details of its experience of pension liberation complaints, an area where although there is an expectation of considerable activity it freely admits to having received relatively few complaints. Indeed, most cases it has seen, and these number less than 40, concern instances where a pension provider has blocked a transfer.
The Ombudsman believes most of the cases it has and will see will be from people who know what they are doing, and believe themselves to be acting within the law.
The Ombudsman is some way into carrying out its investigations into the first few cases it has taken on, and expects to begin reaching decisions in those in April or May. It has also made it clear that no view of the relative merit or otherwise of a case will have been taken at the outset, as it will almost always look at cases within its jurisdiction, whatever their chances of success.
DWP publishes research on pension charges
The Department for Work and Pensions (DWP) has published the findings of a study designed to explore charging levels and structures in defined contribution (DC) pension schemes with a view to assisting it in the goal of maximising the chance of better outcomes for scheme members.
The most common approach to charging found was for members to pay a fixed percentage of their total pension fund value of 0.75% on average.
There is some evidence of differential charging based on membership basis, with deferred members being charged on average 0.38% more than active members where this happens. Differential charging based on the choice of investment fund by the member is more commonplace (the study found, however, that 80-95% of members of contract-based schemes were invested in the scheme’s default fund).
Most schemes seek external advice with the average fee £180 per member for trust-based schemes, and £140 for contract-based ones.
HMRC publishes Pensions Newsletter 60
The latest pension schemes newsletter from HM Revenue & Customs (HMRC) carries a reminder of its requirements and processes for those seeking Fixed Protection 2014 (FP 2014) and Individual Protection 2014 (IP 2014) coverage.
Newsletter 60 reminds that the window for applying for FP 2014 closes on 5 April 2014 and advises how individuals can decide whether they should apply, how to go about applying and how it does not affect their eligibility to apply for IP 2014.
The newsletter also sets out in more detail how HMRC’s scheme registration process will be strengthened with a view to combatting pension liberation (see Pensions Bulletin 2013/44).
When a relationship ends
The Pensions Advisory Services (Tpas) has drawn from its experience of speaking to people about their pension problems to produce a guide designed to help people think through the issues they need to consider around pensions when going through a divorce, separation or dissolution process.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.
