The Financial Conduct Authority has launched a major review of defined contribution pension rules to ensure savers and retirees get better support when making financial decisions.
The review will look at the regulatory framework that governs projections, tools and modellers; the requirements for individual DC pension transfers and consolidation; and the regulatory framework for self-invested personal pensions.
The regulator said the review comes amid a shift in the pensions market from defined benefit pensions to defined contribution pensions, placing greater responsibility on consumers to save enough for their retirement. The introduction of pension freedoms has also increased the volume and complexity of choices for consumers about how to use their DC pension savings through retirement.
The FCA said these changes raise important questions about how the pension system can best support consumers, both those that are engaged and those that are unable or unwilling to take active decisions about their pension.
In addition, the FCA highlighted the ongoing debate about whether enough risk is being taken with pension savings to help ensure individuals have comfortable later-life savings levels and to provide capital from pension pools to support wider economic growth.
Tom Selby, director of public policy at AJ Bell, welcomed the news.
“The FCA has set its stall out today when it comes to pensions, with a clear-eyed focus on ensuring savers and retirees get better support when making often complex financial decisions.
“The regulator deserves credit for taking an open, pragmatic approach that focuses squarely on delivering good outcomes for consumers. Current rules governing projections, essentially a guess at what your pension might be worth decades in the future based on a number of variables, are ripe for review. If it is the case that adopting three different projection values results in disengagement then the case for change is clear.
“Ultimately, none of these numbers are going to be bang on the money, they are simply designed to help give a rough idea of where you might end up. The goal of any changes to projections rules must therefore be simplification to ensure they don’t act as a barrier to engagement.”
Selby said ensuring pension transfers work as efficiently as possible is also of crucial importance and the industry must strike a balance between protecting savers from fraudulent activity and slowing down legitimate transfers to reputable firms. In addition, savers consolidating their pensions with a provider need to consider the overall value of the firm they are transferring to, taking into account things like costs and charges, investment choice, service and retirement income options.
Selby also pointed to the importance of ensuring that the SIPP market remains fit for purpose, given its significant growth, particularly in the wake of the pension freedoms. He said the review “will need to balance ensuring consumers continue to be adequately protected without unnecessarily burdening firms who already have good consumer outcomes baked into the way they operate.”
