Regulating the pensions and retirement income sector: an FCA perspective

Speech by Deb Jones, Director of Supervision, Life Insurance and Financial Advice, delivered at the FCA and TPR Joint Regulatory Strategy - one year on event.

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Speaker: Deb Jones, Director of Supervision, Life Insurance and Financial Advice
Event: FCA/TPR: Our Joint Regulatory Strategy - one year on event
Delivered: 2 October 2019
Note: this is the speech as drafted and may differ from the delivered version


  • The pensions and retirement income sector has experienced, and continues to experience, profound change.
  • We’re focusing on improving pension transfer advice – through our own work and our work with The Pensions Regulator (TPR).
  • We’re planning joint work with TPR on value for money.

It’s a pleasure to be speaking to you about how the FCA, together with TPR, is delivering the joint regulatory strategy we published last October.

Although I’m based down in London I’m pleased to say that we work closely together, not least because an important part of the division I lead is based in our Edinburgh office.

Reflections on the sector

While I’ve been a regulator of one sort or another for fifteen years, I’ve been in financial services for six of those and in my current role for around 18 months. So, I’d like to offer some early impressions of the pensions and retirement income sector, and the specific regulatory challenges it presents. 

Inevitably, these impressions will reflect my earlier roles in regulation – much of my career was spent in competition law, including my first role at the FCA, as the Director of Competition and Economics.

The most immediately striking aspects of the UK pension and retirement income sector are its scale and the profound change it has experienced:

  • The sector serves over 34 million consumers and manages around £2.1 trillion pounds of assets and savings.
  • Over the next five years, the Office for National Statistics (ONS) forecasts that the number of people over 65 in the UK will increase by 1.1 million. The over 85s are the fastest growing segment of the UK population.

However, I am just as struck by the multi-faceted nature of the sector.

Serving consumer needs for accumulation and decumulation, across workplace pensions, non-workplace pensions and other long term investments, involves a lot of different stakeholders. How they interact and who takes responsibility for what can be complex and challenging to understand.

The sector also has a wide range of products and services available. These include free and paid-for services to support consumers throughout their journey; as they make relatively thorny decisions such as those when moving between the accumulation and decumulation phases.

Perhaps linked to this, I’m also struck by the helplessness some consumers can feel when faced with making these decisions, where not deciding may also risk poor outcomes.

I have previously joked that one of the barriers to competition in financial services is that many people would far rather invest their time watching cat videos on the internet than spend time searching for a new bank account. I think the problem is even greater in the pensions sector, where many people know they ought to be engaged, but really don’t know where to start.

What my division does

So, what part do I and my division play? As is often the case with FCA divisions, our name, Life Insurance and Financial Advice Supervision (or LIFA for short), doesn’t really cover everything we actually do.

Together, our teams in Edinburgh and London are responsible for more than 6,500 firms and 72,000 individual financial advisers. Those firms span the long term savings and pensions sector, ranging from the very largest to the very smallest. We supervise:

  • pension providers including the life insurers and SIPP operators. 
  • financial advisers, wealth managers and stockbrokers. 
  • platforms and third-party administrators, including those whose services are not provided direct to consumers, but who may underpin the service of other regulated firms and affect many millions of customers. 
  • We group these firms into ‘portfolios’ that share a common business model. We analyse each portfolio and set a strategy to deal with our greatest concerns in each. 

It’s quite difficult to sum up the breadth of supervisory activity in a few lines. Some of the work will be more visible, and more directly linked to the areas of harm identified. For example, ‘is this firm selling these products so customers know what they are getting?’ or ‘does the advice given by this firm meet our suitability standards?

But there is more work, often much less publicised, to lay the groundwork for firms to treat customers properly. For example, ’has this Life Insurer got a culture where individuals take responsibility?' Does this firm have adequate IT systems to cope with peaks in customer demand?’ ‘Is this adviser insured for what they do?’ or ‘if things were to go wrong, does this firm have a plan to wind down in a way where customers won’t lose out?’

Changing the rules: What I’m not going to talk about today

Now I’ve set the scene, you will understand that my remarks will largely focus on work we’re doing in relation to existing rules and guidance.

But of course, the FCA is also doing a lot of policy work in relation to the pensions and retirement income sector, and I’ll quickly mention two of these work streams before moving on:

Firstly, we’re consulting on proposed measures to change how advisers manage and deliver pension transfer advice, particularly for defined benefit (DB) to DC transfers – our proposals include a ban on contingent charging. Our consultation closes later this month.

The most immediately striking aspects of the UK pension and retirement income sector are its scale and the profound change it has experienced

Secondly, we’re doing work on the role of Independent Governance Committees (IGCs), including their role in driving value for money for members of workplace personal pension schemes. 

We last assessed their effectiveness in 2016 -  a year after they were introduced – finding that they were generally working well but that there are areas for improvement. 

We have now begun work on the further effectiveness review we committed to in our business plan, with the expectation that we will report in spring 2020.

We happily acknowledge that these work streams touch on complex areas and present significant regulatory challenges. I would urge everyone with an interest in these areas to engage as fully and constructively as you can with the respective consultations.

What we’ve been doing to deliver the strategy

I’m sure you are keen for me to be more specific, so let me turn to the recent work of my division on the advice and information provided in relation to, and following, the pension freedoms, particularly transfers from DB schemes.  

DB transfers

This issue really began to crystallise in the public consciousness with the closure of the British Steel Pension Scheme (BSPS), in the wake of that company’s takeover by Tata Steel.

However, I think it is also fair to say that we had completed a significant amount of work before British Steel pensions entered the public consciousness.

You are all aware of the background:

  • DB pensions and other safeguarded benefits involving guaranteed income provide valuable benefits, and most consumers will be best advised to keep them.
  • Since the introduction of the pension freedoms, advice has been mandatory (depending on the pot size) for consumers seeking to transfer out of DB schemes and other schemes with safeguarded benefits.

Significant numbers of consumers with DB benefits have received advice that they should transfer out of their scheme into other forms of savings. Our supervisory work indicates that between the introduction of pension freedoms and September 2018, 69% of consumers receiving advice were advised to transfer. 

Since 2015, we have carried out 3 reviews across the sector to look at higher-risk firms that were giving DB to DC transfer advice. In the most recent phase, we found that only around half the advice we reviewed was suitable.  In our recent consultation paper, we estimated that if the levels of unsuitable advice found in our thematic reviews are replicated across the entire market, the harm of unsuitable advice on DB transfers is in the range of £1.6bn to £2bn each year. Now, given that most consumers will be best advised to keep their DB scheme, this is worryingly high and suggests that consumers may be receiving unsuitable pension transfer advice. Moreover, this issue is not confined to a few firms - 60% of firms recommended that at least 75% of their clients should transfer.

This is a widespread concern. We have also collected market-wide data on DB-DC pension transfer advice, which we published in June this year. This includes data from every firm active in the market. The data has informed our supervision work.

At the time, we said that we had significant concerns about the quality of pension transfer advice. We also said that our ambition is for pension transfer advice to reach the same standard as the wider financial advice market, where we found advice was suitable in around 90% of cases. Not perfect, of course, but clearly much better than what we have been seeing.

This year, we have been visiting the firms most active in this market, and will continue doing so throughout the remainder of 2019. We will also be in contact with all firms where we have identified potential harm in their DB pension transfer advice. We will set out our expectations and the actions they should take.

Depending on the outcome of our 2019 assessments, we will consider extending our 2020 assessments to include a wider range of firms. We will also roll out a series of events aimed at raising standards in the industry and engaging with a wider range of stakeholders. This will continue to be a priority for our work over the coming year. We will carry on until the pension transfer advice market has reached an acceptable standard.

We have carried out 3 reviews across the sector to look at higher-risk firms that were giving DB to DC transfer advice. In the most recent phase, we found that only around half the advice we reviewed was suitable.

As part of our focus on DB pension advice we also have regular dialogue with the other regulators at working level and at senior level.  This dialogue builds on the initiatives set out in our Pensions Strategy the lessons we learnt in late 2017 and throughout 2018, from our work surrounding the advice given to members of the BSPS. The led to a Joint Protocol with the TPR, the Financial Ombudsman Service (FOS), Financial Services Compensation Scheme (FSCS) and Money and Pensions Service (MaPS). The Joint Protocol ensures that we are sighted on issues arising at DB schemes and we can share intelligence and act on it in a coordinated way across the different bodies. 

This dialogue is particularly important where consumers are faced with urgent decisions. To give an example, through early engagement with TPR, we identified a scheme which was undergoing a complex restructure. We were able to quickly and proactively engage with advisers providing advice to members. With the aid of information provided by TPR we identified potential weaknesses in the advice being provided and ensured issues were rectified before the expiry of the decision deadline. 

The broader purpose of our Protocol is to enable our collective early intervention, to help pension scheme trustees ensure that their members are adequately informed when considering transferring their DB pensions.  

We have also continued to work together to support the pension scheme members impacted by the restructuring of the British Steel Pension Scheme. Most recently we organised a series of events in Port Talbot for members that had questions about their advice. MaPS, FOS and FSCS also attended. 

We spoke to steelworkers about what the advice process should have looked like and answered their questions about next steps. We also published a video of the main presentation, to have on our website for those who could not attend.

Value for money

While pension transfers remain a key priority for our work on pensions, we have a wide range of other work going on too. Our strategy identified that we would do more joint work on value for money - and next year we’ll be consulting on a definition, alongside a wider discussion on common principles and standards.

Now, a wide range of our work already touches on value for money – including our recently completed Retirement Outcomes Review, and our ongoing work on non-workplace pensions. 

Our future supervision in this area will be co-ordinated with the planned review of investment pathways. We will start to review the pathways, including the charges applied to them, one year after implementation next year. If at that point we find evidence of problems, we will consider imposing a cap on charges for investment pathways. 

As well as charges, our review will look more closely at how providers are offering investment pathways and how they are complying with the relevant product governance requirements.

Given the location of this event, I thought I might offer an example from an Edinburgh-born economist of poor value for money.

Next year we’ll be consulting on a definition, alongside a wider discussion on common principles and standards.

John Kay, in his book with the catchy title of ‘The Long and the Short of It - Finance and Investment for Normally Intelligent People Who Are Not in the Industry' notes that, over the forty-two years that Warren Buffett has been in charge of Berkshire Hathaway, the company has earned an average compound rate of return of 20% per year. For himself. But also for his investors. 

Now, suppose that he had deducted from the returns on his own investment an annual charge of 2% plus 20% of any gains. There would then be two pots: 

  • one created by reinvestment of the fees Buffett was charging himself; and
  • one created by the growth in the value of Buffett's own original investment. 

So, how much of Buffett's $62bn fortune would be in the fees pot? The answer is $57bn. Only £5bn of the growth would remain in the original pot.

My point here isn’t to disparage the value of intermediation in the sector – nor to promote Buffett for that matter - but simply to illustrate that charges, wherever they sit in the supply chain, can have a big impact on finding a suitable retirement savings vehicle, which delivers genuine value for money.

When financial return is, alongside security, the key feature that ensures consumer needs are met, we want to see firms placing ultimate value for consumers right at the heart of what they offer.

Our Pensions TechSprint – we're all in this together

Now, I’m conscious that much of what I’ve said so far might be characterised as what we as regulators are going to do to the organisations and individuals we regulate within the sector. I hope you don’t think we interpret our respective roles in such a narrow, binary way.

Our strategy is quite explicit in calling on everyone involved in the sector to help us ensure the best possible outcomes for pension savers, now and in the future.A good example of our willingness to engage widely came in November last year, our Pensions TechSprint, which explored how technology can increase consumer’s engagement with their pensions and assist them in making decisions on their retirement options.

Eight teams competed for four prizes, and one of those - DB Mag, who consist of the Pensions and Lifetime Savings Association, Grant Thornton and Retirement Systems - developed an interactive tool that provides information to users when transferring their pension on the potential benefits, risks and value gained.

I’m pleased to say that the team have continued their engagement with us both, and are working towards providing their solution to interested parties.

More generally, I can’t emphasise enough how committed we are to encouraging innovation in the interest of consumers in this and all of the other sectors we regulate.

I’m also struck by the helplessness some consumers can feel when faced with making these decisions, where not deciding may also risk poor outcomes.

Innovation is not an end in and of itself. The point is that the opportunity for consumers to be better served as a result of innovation is clear. Innovation can deliver:

  • products that are better suited to their needs;
  • greater access;
  • or lower prices.

In turn, innovation drives competition. Improvement doesn’t just come from the innovators, but the old guard have to up their game too if they want to avoid losing out. Customers are the winners.

Ideally, we also want to see innovation delivered by a diverse range of participants, both in terms of type of firm, and the people behind the developments. We are convinced that diversity unlocks innovation and ensures new solutions and products are inclusive and designed to satisfy the varied needs and circumstances of consumers.

The FCA started its innovation programme five years ago, and we now provide support for innovators and innovations via initiatives like our world leading Regulatory Sandbox and our Advice Unit.

Pension scams

I want to highlight another ongoing workstream - pension scams. Pension scams are devastating. Victims can lose their life savings, and be left facing retirement with limited income, and little or no opportunity to rebuild their pension savings. That’s why preventing pension and investment scams is a high priority for the FCA and TPR.

Last year, we launched a new joint ScamSmart campaign to raise awareness of pension scams and how to avoid them. During the campaign period 173,000 users visited the ScamSmart site, which helps us warn consumers about unauthorised firms. Earlier this year, we ran the campaign again on TV, radio and online.

Overall in a year, more than half a million people visited the ScamSmart site. Over 6,400 users were warned about an unauthorised firm after using the Warning List.

This pensions campaign built on the ScamSmart campaign we launched in 2014, aimed at preventing investment fraud more broadly. Since 2014 a total of 1.2m people have visited the site and more than 20,000 have been warned about an unauthorised firm after using the Warning List tool. With an average loss to investment fraud of around £30,000, it means we have potentially stopped as much as £600m from falling into the wrong hands.

Everyone can play a part in combating pension scams. Please do everything you can to help.

I hope I’ve given you a clear sense of what we’ve been doing to deliver our joint strategy. I hope I have illustrated some of the breadth of the FCA’s work in this sector.