The impact of new pension flexibilities
The pensions and retirement income market is in the middle of the most significant change for more than a generation. Changes in legislation introduced by the Government, and subsequent rule changes by the FCA, have changed the choices and protections available to consumers, as they save and then choose how to access their retirement savings.
The extent and importance of the changes introduced have required firms to make significant operational and technical changes and have also led the FCA to significantly increase the resources we are devoting to developing pensions policy, monitoring market developments, and supervising firms that are active in this market. Our aim is to ensure consumers are appropriately protected and that there is effective competition in this market.
FCA activities on pensions
Our work on pensions has been informed by the Retirement Income Market Study[1] we published earlier this year, which provided a snapshot of areas where the market was, and was not, working well for consumers. This study concluded with a number of recommendations aimed at improving consumer engagement with retirement decisions. We have welcomed the positive responses from firms to these recommendations and are currently working with a number of firms to behaviourally test new ‘Wake Up’ packs. In our 2015/16 Business Plan[2] we announced that early next year we will carry out a follow up to this market study.
Since the introduction of the reforms our supervisory teams have been monitoring market developments closely to see how firms have responded to the challenges presented by the reforms; how they have met changing consumer demands and to assess how the protections put in place, such as signposting to Pension Wise, are working in practice. More details of some of the information we have gathered are set out in the market monitoring section below. We continue to work closely with regulated firms to understand how they are approaching the development of new products and options for consumers at retirement.
FCA supervisors have also been active in our new role monitoring compliance of Pension Wise by delivery partners and Designated Guidance Providers with the standards. We will continue to carry out this role and in the coming months are taking forward a comprehensive monitoring programme including consumer research.
ScamSmart
Recognising that the pensions reforms also gave rise to an increased risk of potential frauds, we have also focused resource on this. In March we re-ran our Scamsmart campaign. Since launching in October 2014, 100,000 people have visited the dedicated ScamSmart website scamsmart.fca.org.uk, with 20% of visitors checking an investment through the Warning List. We have also seen a 67% increase in visits from consumer groups most at risk, to our scams web content since the campaign started. There have been reports from firms of situations where they have been able, by asking some targeted questions, to prevent customers from losing money by investing in scams. We welcome the ongoing engagement of the industry in this area.
We have also taken steps to seek to clarify the position that we expect firms to take in relation to so-called ‘insistent clients’ publishing a factsheet[3] setting out our expectations on 8 June 2015.
Market update
There has been a significant increase in activity since the pension reforms came into force. For example, there were over one million calls to insurers in the first month of the pension freedoms, representing an 80% increase in year-on-year volumes. Most firms have coped well with this additional demand, but we also know there have been some operational challenges at a minority of firms. For example, telephone call wait times and abandonment rates were higher than all parties would have liked in April, although they have improved since that time and are continuing to improve.
We are also aware that some firms have had some operational problems delivering on customers’ instructions, whether they are to switch products or providers or access cash. Our supervisors have been collecting regular data extracts from the main pension providers (representing 84% of the market), capturing customers’ experiences of the new freedoms at each firm. To date we understand that the majority of people have been able to take advantage of the new freedoms without any significant problems. We have produced a short summary of some of the data we have received in the graphic below. We are continuing to collect detailed information from individual firms. Given the market is at a very early stage of development most of the data available inevitably focuses on service metrics rather than testing outcomes for consumers.
In the first three months, many of the people looking to access their pensions as a result of the new freedoms have smaller pots, typically under £50,000. Many of these smaller pensions have been taken as cash. Early indications from our supervisors are that retirement risk warnings are being delivered and that call length for consumers has reduced from 10 minutes to 8.5 minutes.
As the new freedoms bed in, it is important that consumers can utilise the new options available to them but also that the new landscape ensures that consumers have the appropriate level of protection when deciding what to do with their pension. Many pensions will have particular features within them, for example guaranteed annuity rates, which would cost considerably more than the value of the pot to buy today in the open market. It is therefore important that consumers understand those valuable features and take them into account in their decision making. It is in everyone’s interest to ensure that consumers can use the new options available to them with confidence.
Pension activities: next steps
While the evidence points to the overall majority of consumers having been able to take advantage of the new flexibilities, we are aware of some situations where this may not have been the case. We are also aware that the range of new products available is currently limited and we expect to see the market evolve over time.
The FCA has discussed with Ministers from HM Treasury and Department for Work and Pensions developments in the market following implementation of the pension flexibilities. On 17 June 2015, Harriet Baldwin MP, Economic Secretary to the Treasury, wrote[4] to Martin Wheatley, Chief Executive of FCA expressing concerns that some people may have been facing unnecessary barriers when seeking to access their pension savings. Discussions with the Baroness Altmann, Pensions Minister, also highlighted concerns that some customers were unable to access the flexibilities they had expected.
Request for information
Given our objectives to ensure effective competition and appropriate consumer protection, we are keen to explore further the barriers consumers face. We have therefore today sent all pension and retirement income providers a request for information[5] about any barriers faced by consumers who are seeking to access their pension savings.
We have worked closely with The Pensions Regulator to ensure that as much as possible our data requests are comparable, while allowing for the differences in the markets we regulate. We will continue to work closely with them as they take forward their work programme, in particular in their work on transfers from Defined Benefit pensions.
As announced earlier in the year, we are currently reviewing our pension rules and will be consulting later in the year where we consider further changes are necessary. This will include reviewing our retirement risk warnings and incorporating elements of the ABI’s code of conduct on retirement choices[6] into our rules.
We are also analysing closely developments in the decumulation market, including but not limited to the types of products developed and charges faced by consumers taking advantage of the new flexibilities. We intend to return to firms later in the year requesting further information about the development of this market.
Christopher Woolard
Director of Strategy & Competition