Pensions and retirement income is a priority sector for the FCA, given the fundamental recent changes to the market and further changes to follow in 2017. Read more about our policy work and market monitoring in this area.
Since the introduction of the pension reforms in April 2015, there have been a number of key market developments. The market is more fragmented, in the sense that consumers are accessing their savings through a wider range of products and options, with annuity sales at lower levels than before the reforms.
In response to these changes, firm business models are adapting, and new policy and regulatory issues have come to light, such as barriers to accessing the pension freedoms. Alongside this, the sustained period of low interest rates has had an impact on investment returns.
We are also aware of concerns that have been raised in relation to annuity rates, product charges, non-advised sales and sustainability of income. Further market changes will follow in 2017 with the introduction of the secondary annuity market and the Lifetime ISA.
Against this backdrop of change, our priority is to ensure that our regulatory approach supports fair treatment of customers and encourages competition across the sector. We are also focusing on raising consumer awareness, disrupting scams, and taking enforcement action against unauthorised businesses. To achieve this we are undertaking a wide range of work:
- Supervision, designed to identify and tackle misconduct.
- Policy work to implement and support the government’s reforms in line with our statutory objectives.
- Market-based analysis of how the market is operating and evolving with the reforms, with a view to putting the market on the best footing for the future.
This update explains our ongoing work and provides more information on 2 specific pieces of work:
- The Retirement Outcomes Review , the follow-up to the Retirement Income Market Study, which was completed in March 2015.
- The results of our behavioural testing of the annuity comparison remedy proposed as part of the Retirement Income Market Study, and the next steps for the design and implementation of that remedy.
Fair treatment of long-standing customers
In March 2016 we published a report setting out the findings of our thematic review of the fair treatment of long-standing customers in the life insurance sector. We found that most of the 11 firms in our sample are demonstrating good practice in one or more areas, and poor practice in others.
We are undertaking further work to address these findings and will also publish non-Handbook guidance in due course which will provide firms with extra detail on the actions they should be taking in order to treat their closed-book customers fairly in the future.
Annuity sales practices
We are also continuing our thematic review of firms’ disclosures to existing customers about enhanced annuities through their non-advised sales processes.
We took an initial sample which indicated that customers may have been given insufficient information about the availability of enhanced annuities, their potential eligibility and the fact that they could have received a higher income if they shopped around.
We have therefore asked several firms to carry out a more extensive sample review of their past annuity sales, and will assess the results of this work to decide our next steps.
Changes to our rules and guidance
To ensure our regulatory requirements are fit for purpose and provided appropriate and proportionate consumer protection in the new pension environment, we reviewed our pension and retirement income rules in the first half of 2015.
We consulted on proposed changes in October 2015 and published our final rules and guidance in April this year. The changes focus on ensuring that consumers get relevant, timely and adequate information to help them explore the range of options for accessing pension savings and enable informed decision-making both at their intended retirement date and beyond.
Secondary annuity market
In March 2015 the government announced that it was consulting on allowing individuals to sell their annuity income, as long as their annuity provider agreed, without the tax restrictions that currently apply.
This market is due to begin in April 2017, and will create 3 dedicated regulated activities for the secondary annuity market. We are currently consulting on the rules we plan to apply to these new regulated activities.
Early exit charges cap
In January 2016, the Chancellor announced that the government would introduce legislation to place a new duty on the FCA to cap early exit charges for consumers eligible to access the pension freedoms. The objective of the cap is to secure appropriate protection against early exit charges deterring consumers from accessing the pension freedoms.
In May 2016 we proposed that, for existing contract-based personal pensions, including workplace personal pensions, exit charges will be capped at 1% of the value of a member’s pot. Firms will not be able to apply any exit charge for personal pension contracts entered into after the proposed new rules come into force.
Separately, the Department for Work and Pensions is consulting on capping early exit charges for members of occupational pension schemes.
Forward-looking markets-based analysis and monitoring
Retirement Outcomes Review
In our Retirement Income Market Study in March 2015 we identified a number of issues relating to consumer decision-making following the introduction of the pension reforms. Now these reforms have come into effect, we want to assess their impact on competition in the decumulation market by looking at how firms and consumers have responded to the new freedoms.
We will do this through the Retirement Outcomes Review, which we have launched today (July 14) by publishing its Terms of Reference. The review will explore the following:
- Shopping around and switching: given what we know about the difficulties in shopping around for annuities, we want to understand to what extent consumers can compare the larger range of products/options now available to them. We want to understand whether they can shop around, switch providers where they are not receiving what they want, and make good, informed, decisions.
- Non-advised consumer journeys: now consumers are accessing more complex products without advice, we want to understand whether non-advised consumer journeys have become more complex. We will explore whether there is complexity that causes consumers not to engage, or leads them to being drawn towards certain products, choices and decisions.
- Business models and barriers to entry: as firms adapt with the changes we are seeing in this market, we want to explore what business models and products are emerging and what risks might they pose to competition in this market. For example, how might firms’ business models impact on consumer engagement and switching, and are there barriers to entry for challenger firms?
- Impact of regulation on retirement outcomes: although proportionate regulation intends to bring about positive outcomes, are there examples of FCA regulation that are overly burdensome and may be inadvertently contributing to barriers to entry or preventing useful product innovation by firms?
We want to engage with industry and consumers during this review to help inform our regulatory approach in this developing market. As part of this process, in our Terms of Reference we have set out some specific questions relating to the issues we have included in the scope of this review.
We encourage firms and other stakeholders to respond by 31 August 2016.
Data collection – understanding the market
As part of the commitment we made in the Retirement Income Market Study to monitor market developments following the introduction of the pension reforms, we are collecting data from a representative sample of pension and retirement income providers. The data includes the following:
- Choices made by consumers accessing their pensions.
- Guaranteed annuity rates – levels taken up and not taken up.
- Levels of pension withdrawals for customers making a regular withdrawal.
- Use of regulated advisers.
- Whether consumers change providers when accessing their pensions.
- Complaints about pension and retirement income products.
A summary of the data we collect is published in our quarterly Data Bulletin, alongside the full data .
Market study remedies: annuity comparator and wake-up packs
In policy statement PS16/12, we considered how consumer journeys have changed following the introduction of the pension freedoms. In addition to this, we are continuing work on 2 remedies, proposed by the Retirement Income Market Study (RIMS). These also address the consumer journey at retirement.
At an early stage in that journey, consumers receive at-retirement communications from their provider, sometimes referred to as ‘wake-up packs’. RIMS proposed that these communications should be clarified and simplified to help consumers exercise choice effectively.
We are behaviorally testing the effectiveness of variations to firms’ ‘wake-up packs’, via randomised control trials. We anticipate that following these trials, we will publish the results and consult on any proposed rule changes in early 2017.
Following the pension freedoms, significant numbers of consumers are still choosing to purchase an annuity. For these customers, RIMS proposed the creation of an annuity comparator to improve competition and help consumers get a better deal.
The proposal provides targeted information, just before the point of purchase, to encourage consumers to shop around. Read the full report of the behavioural testing on this proposed remedy.
The results of our testing demonstrate that the proposed remedy is effective at encouraging consumers to shop around and, where appropriate, switch provider. This remedy should improve competition in this segment of the market to the benefit of consumers, and we will therefore consult on rule changes later this year.
When we completed the Retirement Income Market Study we acknowledged the need to develop comparison tools for income drawdown and other new products as the market develops. With the flexibilities open to consumers it is important that they can select the right types of product for them, as well as being able to compare different providers.
In the Retirement Outcomes Review we will consider and research how consumers can be encouraged to shop around for products like drawdown, and what steps are necessary to encourage informed decisions.
Since the introduction of the pension reforms, consumers have had access to the Government’s Pension Wise service (now a government service from MoneyHelper). The Government now regularly publishes statistics on the usage of the service.
The Pension Wise service is delivered by ‘designated guidance providers’ (DGPs). The FCA is responsible for monitoring how well DGPs meet the standards we set for them, and we make recommendations to the DGPs and the Government, where appropriate.
We will continue to review the appropriateness of our standards and recommendations policy, and we will be amending and adding to these standards to take account of the forthcoming secondary annuities market. Consumers—and contingent beneficiaries—considering selling their annuity will have access to guidance from Pension Wise when that market begins in April 2017.
Signposting to Pension Wise
Aligned with the FCA’s continued commitment to monitor and assess the impact of pension reforms, we have recently completed a review looking at how firms are complying with the relevant COBS rules around signposting the availability of pensions guidance when communicating with their customers looking to access their pension savings through non-advised sales channels.
In addition, while pension freedoms provide increased opportunities to choose how to access pension savings, they also present greater risks of irreversible losses from pension fraud and scams. We therefore sought to understand how firms are highlighting this risk to their customers.
Our review focused on desk-based analysis of information provided to us by 20 firms - 10 Life Insurers and 10 self-invested personal pension (SIPP) operators.
We found that the majority of firms in our sample were, on the whole, meeting our requirements around signposting to pensions guidance. However, we did identify a number of areas where improvements could be made. In relation to raising customer’s awareness of pension scams, we were encouraged to see some firms in our sample taking a particularly proactive approach, identifying a number of good practices which other firms could consider adopting. Read our more detailed findings.
We encourage all firms engaging with customers who are looking to access their Defined Contribution (DC) pension savings through non-advised sales channels to review these and consider what action (if any) they should take in light of the findings.
We continue to target raising consumer awareness of scams and disrupting fraudulent activity. We have recently re-launched our ScamSmart campaign to help educate those consumers at risk and to help them to avoid scams. Consumers can also use our FCA Warning List to check the list of the firms we know run scams or operate without authorisation.
We have also enhanced our intelligence capabilities in relation to pension scams and mis-selling, creating a dedicated team to collate, analyse and act on incoming and self-generated intelligence. We work closely with the National Fraud Intelligence Bureau and The Pensions Regulator to ensure that our actions are coordinated, thereby enhancing each organisation’s efforts.