Speech by Sarah Pritchard, Executive Director, Markets, to the Pensions and Lifetime Savings Association
Speaker: Sarah Pritchard, Executive Director, Markets
Event: Pensions and Lifetime Savings Association
Delivered: 14 October 2021
Note: This is a drafted speech and may differ from the delivered version
- Effective pensions regulation relies on deep partnership between the many regulators and policy makers that operate in the pensions space
- We have 3 main priorities in the FCA focusing on advice and guidance for consumers, seeing that pension products are well designed and represent value for money; and making the pensions market work well, without scams
- We are already changing to become a more innovative, assertive and adaptive regulator, reflecting the world we operate in, and will continue to do so in the months and years ahead
Hello and thank you for the opportunity to speak here at your annual conference. It’s great to be able to speak to this audience, which covers so much of the UK’s workplace pensions market.
I’m Sarah Pritchard, the FCA’s new Executive Director for Markets. I’m responsible for the FCA’s overall market integrity objective. My job is to make sure that the markets work safely and well. And that they do so in a way that protects consumers and promote competition in the interest of consumers.
I co-lead our Supervision, Policy and Competition division with Sheldon Mills. But most relevantly for you, I’m responsible for the FCA’s pensions policy, as well as supervision of many parts of the pensions journey - including advice, asset management, and the provision of personal and stakeholder pension schemes.
Before joining the FCA, I worked across the public and private sectors, with a focus on financial crime, seeking to bring about safe and secure financial services. Most recently I led the National Economic Crime Centre – a new multi-agency partnership that brings together law enforcement, regulators, prosecutors, policy makers and the private sector to improve the UK’s response to economic crime.
That experience showed me the importance of working in partnership with others in order to drive change – and the need to set clear expectations against which progress can be measured.
I wanted to speak to you today about a few key themes.
Firstly, partnership – I'd like to explain how we partner with others in the pensions space to set out clear and robust expectations and to help ensure that the market works as well as it can for consumers.
Secondly, our priorities, and thirdly, predictions for the future.
There are many regulators and policy makers that operate in the pensions space. The FCA, the Pensions Regulator (TPR), DWP (Department for Work and Pensions), and of course, HMT (Her Majesty’s Treasury) to name a few.
Effective pensions regulation relies on deep partnership between everyone. While we may have slightly different technical rules, we all aim to deliver equivalent good outcomes for consumers, however they save for their pension.
To be frank, most consumers have no idea how their pension is structured or who regulates it. Pensions are often described as a 'minefield' - our financial lives survey shows that even people who are confident in all other aspects of their financial lives, find pensions difficult to understand.
31% of adults who are building up their pension don’t know who their pension provider is.
And 33% of those who are decumulating their pension don’t know either.
The complexities of regulation, and who is responsible for different pension products, is not something that we can expect everyone to understand – so it is important that we act together with others – which is a key theme under our business plan this year.
It is only by working seamlessly together as one regulatory family, in collaboration with the industry, that we can deliver the consistent pensions landscape that the public expect.
This talk is billed as an update from the FCA, so I’m going to explain our main focus areas, and the regulatory initiatives coming down the track.
Broadly, we have 3 main priorities in the FCA:
1. Helping ensure that consumers have the right level of advice and guidance to help them make informed decisions as they both build up, and then access, their pensions.
2. Seeing that pension products are well designed and represent value for money - and that people are able to actively compare products; and
3. Making the pensions market work well, without scams. This means taking steps to stop scams from reaching consumers in the first place (a change that we believe needs legislation, as part of the Online Safety Bill, to bring paid for advertising within scope of that legislation). As well as helping consumers know how to protect themselves from the risks of scams.
Right level of advice and guidance
For most of us, our pension is the largest pot of savings we will ever build. The decisions we take about our pension are ones we have to live with, often for decades, in our retirement. At the same time, we have seen pension freedoms present consumers with a vast range of choices about how to draw on their pension in retirement. These choices really matter but people often need help to navigate them.
That’s why we’re focusing on helping to drive more guidance and advice across the pensions industry – that this is provided by the right people - at the right time.
What are we doing?
Four weeks ago we published our Consumer Investments Strategy, in which we said that we wanted to create the right environment for consumers to invest. We want to see a market in which people can invest with confidence, understanding the risks they are taking, and the regulatory protections offered. We said that we do not want to restrict people if they want to invest, but we want people to be able to access and identify investments which suit their circumstances and attitude to risk. Getting the right advice or support that is needed is key to this.
These principles apply for pensions too.
We want to see more guidance – and are encouraging firms to give guidance, where this is possible, without crossing the advice/guidance boundary. The boundary is laid out in law and exists for a very good reason, to protect consumers. But we believe that more can be done.
We know that there are different risk appetites and tolerances across the industry– but to help industry navigate this we published, in March this year, joint guidance with the TPR for employers and trustees on providing support with financial matters without needing to be subject to FCA regulation.
In February this year we introduced investment pathways, so that people who have decided to drawdown their funds, without seeking financial advice, can receive guidance about the options available.
Pathways are what is described as 'choice architecture' - people are asked to say what they want to do with their pension funds over the course of the next 5 years. Appropriate investment solutions are then offered, or can be compared by the consumer.
We introduced this because we knew that significant numbers of people in drawdown were concentrating only on their 25% lump sum – with many (1/3) not knowing where their remaining pension was invested. Prior to investment pathways (and the cash warnings which were introduced at the same time) people who did not get financial advice were more likely to be defaulted into cash or cash like investments. This is not a good outcome for consumers and is not a sign of the market working well.
Although it is early days, initial data from a survey by ABI (Association of British Insurers), suggests that 40% of those who use IPs, are taking up the pathway investment solutions offered. We will be doing a post implementation review after 1 year, i.e after Feb next year, and will be looking to see whether this choice architecture/guidance has improved outcomes for consumers.
If it has then this framework could be used in other situations. Our CI (Consumer Investment) strategy talks, for example, about introducing a similar guided sales wrapper for stocks and shares ISAs (Individual Savings Account).
We know that accessing a pension will always be a major decision for any consumer, and investment pathways doesn’t replace proper advice and guidance.
Where consumers do look for further support from a financial adviser, we are determined that the market provides high-quality advice, which is suitable for their needs.
We also want to see the industry regularly signal guidance, directing people to Pension Wise. We are doing several things to support this:
We have recently consulted on what we call a stronger nudge, aiming to deliver what parliament has decided under the Financial Services Claims Act, to ensure that people are directed to PW when they seek to drawdown or otherwise access their pension.
We have asked for views on any other steps that could be taken to improve take up levels, recognising that behavioural testing to date shows that take up is increased when PW guidance is signalled as part of the normal consumer journey. I would welcome any thoughts you have in the Q&A at the end of this session.
And of course, firms are now required to issue ‘wake-up’ packs to people at age 55, and every 5 years after. Wakeup packs signal the availability of PW guidance.
Well designed products that represent value for money
Our second focus area is that we want to see well designed products that represent VfM (Value for Money). This is a joint area of focus with the TPR.
You may have seen that a few weeks ago we published a joint discussion paper to seek views on how we can define, measure, and work to improve Value for Money in pensions.
We are clear that VfM encompasses several areas – investment performance, scheme oversight and costs and charges. We have very recently published rules that make this clear, bringing our rules into line with those that have already been in place for schemes regulated by TPR.
The aim of our joint discussion paper is to test how we can get to a position where all participants across the industry are collecting similar data and metrics, which can then enable people to more actively compare products and assess VfM holistically.
We want to move away from a singular focus on charges: as the Productive Finance Working Group has highlighted long-term investments - which can in some cases attract higher fees - may still provide good value to those building up their pension.
VfM is not just an issue for consumers – it should also be a key focus for Independent Governance Committees (IGCs) and Governance Advisory Arrangements (GAAs). In our recently published rules we set out our expectations for how IGCs and GAAs should assess VfM so that IGCs and GAAs can deliver consistent oversight and challenge.
We welcome your input into our joint discussion paper before it closes on 10 December.
A market that works well without scams
Finally, any consumer making choices, also faces risks.
We want people to be better protected from the risks of scams and know how to protect themselves against them.
Over one million people have accessed Scamsmart website since its launch in 2014 and more than 20k have seen our warnings about specific unauthorised firms.
But more needs to be done.
- We would like to see a focus on preventing people being targeted via social media.
- We would like paid for advertising to be brought in scope of the online harms bill.
- We also want to increase the levels of understanding – very soon we will be launching a multi-year investment harms campaign to target young consumers and warn of the harms that can exist when investing.
It's important that we also all understand where to go for advice and guidance, and tell our friends/family/colleagues too:
- Our key message is that if it seems too good to be true it probably is.
- Check Scamsmart website for advice/guidance on scams and fraud
- Report suspected fraud to Action Fraud
- Visit the FCA Register to make sure the firm you’re dealing with is authorised, check our Warning List of firms you should avoid, and use the contact details on our FCA Register, not the details the firm gives you, if you suspect fraud.
And finally – future predictions
In our FCA Business Plan this year we talk about becoming a more ‘Innovative, assertive, and adaptive’ regulator.
We are already changing, reflecting the world we operate in, and will continue to do so in the months and years ahead.
Becoming more innovative:
- In a pensions market which can often be opaque, it is vital that we support innovation. Technology is on the verge of putting information about a lifetime of pension savings into a consumer’s hand, allowing them to get a clear view of their savings from a range of providers through the Pensions Dashboard Programme, led by Money Advice and Pensions service. We are supporting that by working to introduce rules to require providers to submit their data, and in due course to authorise any other providers of pensions dashboards.
- We hope that dashboards will increase people’s engagement with their pensions, by easily showing them the pensions that they hold and their value.
- Policymakers and experts have already started to talk about whether dashboards should also allow people to also invest at the touch of a button. This would give consumers previously unimagined choice- but also risk. The FCA will continue to work with policy makers and those leading on these programmes with the aim of protecting consumers as any new proposals emerge.
Becoming more assertive:
- You should be in no doubt that we will be assertive when we need to be. Our aim is to make greater use of data in the future, using our extensive and increasing data sources to identify issues before they cause serious harm.
- This will allow us to intervene earlier where we see things going wrong, using all of our legal powers.
- We have seen some consumers suffer serious harm in recent years, most obviously with DB transfers. We are taking decisive action to ensure firms provide redress where they should, as well as seeking to act quickly to prevent harm in future.
Becoming more adaptive:
- Finally, the FCA has also pledged to be adaptive, changing our regulatory framework to meet evolving demands and learn from a fast-accelerating industry. We will look at where we can clarify and simplify regulations, to deliver high standards in the most efficient way.
- Our regulatory framework will need to change to accommodate the growing focus on ESG across the financial sector, and to meet the societal challenge of achieving net zero. The pensions industry has an important role to play in active stewardship on climate change and other ESG matters. We will soon be publishing a refreshed ESG strategy, in which the transition to a more sustainable future and the role of investor stewardship feature prominently. We will continue to work closely with the Financial Reporting Council in their application of the 2020 Stewardship Code, which sets a high standard for stewardship in the UK.
- I know as pension professionals you are very used to taking a longer view. I am keen to hear your thoughts about how the market may evolve in the years ahead and the role that we should play as a regulator. We also welcome the recent report from the DWP-commissioned Taskforce on Pension Scheme Voting Implementation, and will carefully consider its recommendations on matters such as voting transparency. We agree with the Taskforce that there is no regulatory barrier to pension scheme trustees’ issuing an ‘expression of wish’ to their asset managers regarding their voting preferences, and no breach of fund rules where a fund manager takes the expression of wish into account when voting.
- Diversity and Inclusion is also an area where change is needed – we have been clear that we expect the industry to make a substantial and urgent effort to create a diverse pipeline of talent, and to consider the diversity of those who you invest with. IGCs and trustees should treat D&I with the same seriousness they would investment risk and return.
- To support more long-term investing, we have recently consulted on proposals to introduce a Long Term Asset Fund, which is likely to be of interest to pension funds. Rules will be introduced shortly on this, to establish a new LTAF framework before the end of the year.
- And obviously, as we move into a world where people will be increasingly retiring without the security of a Defined Benefit pension, with a guaranteed income in retirement, we will need to see how other products develop and what happens with the introduction of Collective Defined Contribution schemes. A shift into a world where more consumers rely on DC schemes for their retirement will vastly increase the importance of consumers’ investment decisions, as well as the choices they make about how to access their pension. We will need to adapt to that, and are seeking to do so now by encouraging a greater use of advice and guidance.
We still have some way to go before we can be satisfied that we have a market that works well, that protects consumers, and promotes competition in the interests of consumers. I hope I’ve given you a clear view of our current priorities and future areas of focus.
By listening to each other, we can make sure we get the details right and deliver that. In that spirit, I look forward to your questions.