Memorandum submitted by the Financial
Services Authority (FSA)
A. INTRODUCTION
1. This memorandum is submitted by the Financial
Services Authority (FSA) in the context of the Committee's Inquiry
into Pensions. We look forward to elaborating on it in oral evidence.
2. The memorandum:
— provides brief background on the
FSA, including its scope and overall approach to regulation;
— describes the FSA's remit in relation
to pensions;
— describes how the FSA co-operates
with the Pensions Regulator;
— discusses the key regulatory issues
arising from the proposed National Pension Saving Scheme (NPSS);
— describes the considerations when
designing a regulatory regime for the NPSS;
— considers what lessons can be learnt
for the NPSS proposals from the introduction of stakeholder pensions;
and
— describes the FSA's work in financial
capability insofar as it relates to pensions.
B. BACKGROUND
INFORMATION ON
THE FSA
3. The Financial Services and Markets Act
2000 (FSMA) gives us four statutory objectives: to maintain market
confidence; to provide the appropriate degree of consumer protection;
to promote public understanding of the financial system; and to
reduce financial crime. In carrying out our general responsibilities
we must also have regard to seven principles of good regulation,
including using our resources efficiently and economically, proportionality,
and facilitating innovation and competition.
4. Our retail work is designed to make a
real difference to firms and consumers. We focus our activities
on four main aims: capable and confident consumers; clear, simple
and understandable information available for, and used by, consumers;
soundly-managed and well-capitalised firms which treat their customers
fairly; and risk-based regulation which enables us to focus our
resources and activities on the most significant risks, through
firm-specific and thematic supervision.
C. REGULATING
PENSIONS: THE
RESPONSIBILITIES OF
THE FSA AND
THE PENSIONS
REGULATOR
5. The FSA regulates the sales and marketing
of personal pensions (including stakeholder pensions) and annuities.
Regulation of sales and marketing includes the suitability of
advice, pre-sale disclosure and firms' financial promotions. We
regulate firms selling and giving advice direct to consumers and
the providers of personal pension products.
6. We are responsible for the prudential
regulation of the firms who provide personal, including stakeholder,
pensions and annuities. Our objectives are to ensure that firms
have sufficient resources, adequate senior management arrangements
and systems and controls in place to manage their business properly,
both in normal and adverse circumstances. Firms should maintain
sufficient assets to meet their operational costs and their obligations,
including paying claims and benefits to customers in a timely
manner. They should also have sufficient capital to absorb losses
from risks inherent in the business where necessary. We require
firms to comply with our Principles for Businesses, which include
paying due regard to the interests of their customers and treating
them fairly.
7. From April 2007 we will also be responsible
for regulating the establishment, running and winding up of all
personal pension schemes including self-invested personal pension
schemes (SIPPs).
8. We have a statutory responsibility to
promote public awareness and understanding of the financial system,
which extends to all forms of pension provision.
9. We are responsible for appointing members
to the Financial Ombudsman Service (FOS) Board and for setting
the scheme's scope and jurisdiction. The FOS handles complaints
about the sales and marketing of personal, including stakeholder,
pensions, while the Pensions Ombudsman handles complaints about
the way pension schemes are run.
10. The Financial Services Compensation
Scheme (FSCS) is the UK's statutory fund of last resort for customers
of authorised financial services firms. The Scheme covers investments,
deposits, insurance and mortgage business; it does not cover occupational
pension schemes. The FSCS is independent from the FSA. The conduct
of the Compensation Scheme is the responsibility of its Board
of Directors, who are appointed by the FSA.
11. We do not regulate occupational pension
schemes; that is the responsibility of the Pensions Regulator
(TPR). We do, however, have an indirect interest in occupational
pension schemes because we regulate firms which provide investments
and investment services to the schemes, for example investment
managers and insurers selling insurance-based pension products.
12. TPR's objectives, as set out in the
Pensions Act 2004, are to protect the benefits of members of work-based
pensions, reduce the risk of situations that might cause a call
on the Pension Protection Fund and promote the good administration
of work-based pensions. To this end, TPR's regulation of (trust-based)
occupational pension schemes encompasses their funding, governance
and administration and the discharge by employers of their responsibilities
to the schemes that they sponsor. TPR also regulates many aspects
of stakeholder pensions—their registration, employer designation,
and compliance with the charge cap. TPR oversees the other duties
imposed on employers, trustees and managers in relation to all
work-based pensions, including the timely payment of contributions
by employers and the administration of work-based personal pension
schemes. To these ends, TPR also provides information, education
and assistance in relation to work-based pension schemes to:
— trustees of occupational pension
schemes;
— those involved in the administration
of work-based pensions;
— those who advise trustees and managers
on the operation of work-based pensions;
— those who advise employers.
13. The FSA and TPR have a memorandum of
understanding in place that sets out how we will work together.
We work closely with TPR and coordinate our approach with them
where appropriate.
D. NATIONAL PENSIONS
SAVINGS SCHEME
14. The Pensions Commission has proposed
the creation of a National Pension Savings Scheme (NPSS). The
NPSS would be a low cost, state-administered scheme, where employees
who are not in a "good scheme" (defined as one where
the employer is making contributions of at least 3%) are automatically
enrolled into the scheme. Employees would be obliged to make 4%
contributions and their employer would be obliged to contribute
3% of salary; a further 1% would be gained in tax relief. Membership
of the scheme would not be compulsory, as employees would have
the right to opt out. The Pensions Commission also proposes reform
to the state system (especially reducing the reliance on means-tested
benefits) and expresses the view that reform of both state and
private pensions is necessary to secure the required level of
change.
15. The FSA does not have a view on whether
the Government should introduce a NPSS as recommended by the Pensions
Commission, nor on what form it should take. The proposals that
will be contained in the White Paper are decisions for Government;
what follows is an outline of the regulatory issues that will
need to be considered. We do not consider in this memorandum what
regime might be introduced to ensure employer compliance with
any obligations placed upon them; this is not a matter for the
FSA.
16. We continue to work closely with DWP
in developing an appropriate regulatory regime for any NPSS that
may be introduced. We, together with TPR, are analysing the proposed
NPSS and alternative models and are indicating to DWP the types
of risk which may arise; whether a regulatory response might be
necessary; and, where appropriate, an indication of the likely
nature of this response. The Government has said that it will
publish a White Paper in the Spring.
Industry alternatives
17. A number of organisations have published
alternative models for the NPSS, in particular the Association
of British Insurers (ABI), the Investment Management Association
(IMA) and the National Association of Pension Funds (NAPF). All
support the Pensions Commission's proposals for auto-enrolment
of staff, employee and employer contributions, and the removal
of advice from the process, but some offer alternative ways of
achieving these objectives. The points of difference include the
level and complexity of decisions that employees and employers
will be required to make, who will run the scheme, and the underlying
investment proposition.
What are the regulatory considerations?
18. How the scheme interacts with consumers
Employees and scheme members need information
so that they are able to make appropriate decisions. These include
whether to join the scheme or to opt out; how much to contribute;
and which fund to invest in. The way in which the scheme interacts
with scheme members needs to be considered throughout the consumer's
membership of the scheme. This includes the joining process, answering
queries, changing personal details, changes to contribution levels,
variations in fund choices and provision of annual statements.
19. Suitability
A key part of the Pensions Commission's proposals
(and the industry alternatives agree) is to remove the requirement
for advice and therefore regulation of this advice. If as the
Pensions Commission suggests, there are compulsory employer contributions
to match the employee contributions and a reform of means testing,
it is probable that suitability rules will not be as important
as they are currently in the regulation of personal pensions.
The proposed NPSS's near universal suitability is contingent on
employer contributions and the reform of means-tested state pensions
and without these it would be more difficult to demonstrate.
20. Administration of the scheme
Contributions received from and on behalf of
members of the scheme should be correctly allocated to the relevant
individual accounts in a timely fashion. Payments out of the scheme,
such as transfers to other schemes, the purchase of an annuity,
or death claims on behalf of its members, also need to be accurate
and timely.
21. Prudential rules for the scheme
To protect consumers, firms offering financial
services need to have sufficient resources and adequate senior
management arrangements, systems and controls in place as described
in paragraph 6 above.
22. Such principles of prudential regulation
may also be applicable to any NPSS that may be introduced. The
approach to and the level of prudential regulation required of
any NPSS that may be introduced would depend on how the Government
decided to set it up. The more the risk is carried by the private
sector, the more likely there is to be a need for prudential supervision
with powers of intervention where necessary.
23. Handling complaints about the scheme
In a scheme of this size covering so many people
there are bound to be members (or employers) who wish to complain,
for example about the administration of the scheme. A process
for this and rectifying situations where the complaint is valid
will have to be put in place. Consideration also needs to be given
to the appropriate redress process and funding.
E. HOW REGULATION
OF A
POSSIBLE NPSS MIGHT
WORK
24. The extent to which any NPSS that may
be introduced or the industry alternatives will require regulation
will depend upon the extent to which the risks and regulatory
issues outlined above materialise. We outline below arrangements
which would require only a light regulatory approach.
— Compulsory employer contributions—provided
employers are required to make compulsory matching contributions,
the wisdom of not opting out of the scheme is readily apparent
as consumers will gain financially from the employer contribution.
— Automatic enrolment—if employees
are to be auto-enrolled into the scheme there is no need for a
sales force and therefore there is no need for a regulatory framework
around the sales process.
— A single pension provider—provided
there is only one pension provider and therefore only one product
to choose, there is less scope to add product features that complicate
the decisions for consumers and which would be suitable for only
limited numbers of consumers.
— Limited investment choices—the
evidence presented by the Pensions Commission shows that most
consumers will opt for a default fund. The fewer investment choices
and decisions that a consumer has to make the less likely they
are to need advice.
— Reform of state benefits system—the
fewer people affected by means-tested benefits, the more likely
that saving for a pension through any NPSS that may be introduced
will provide the consumer with a benefit.
25. Features that would increase the likely
requirement for regulatory interventions are, as one would expect,
the converse of the issues listed above.
— A relaxation of the employer contribution
requirement. The employer contribution is key to addressing suitability
issues. Without it suitability is much less easy to establish.
— The introduction of a sales process
either at employer or employee level. As soon as joining any NPSS
that may be introduced becomes intermediated, there is likely
to be an information asymmetry and the chance of mis-selling increases.
— The introduction of multiple products
and providers will complicate the decision-making process for
consumers. In addition the product providers may need greater
levels of supervision from a prudential and administrative perspective.
— Increased availability and complexity
of investment funds would lead to a requirement for clear descriptions
of the funds and for consumers to understand properly the level
of investment risk to which they are being exposed.
— A state benefit system with widespread
entitlement to means-tested benefits may mean that any NPSS that
may be introduced is not suitable for some, since they would be
worse off through joining and contributing to it.
26. One of the key decisions from the FSA's
perspective is whether any NPSS that may be introduced is established
as an occupational pension scheme, a personal pension scheme or
indeed some new entity. If it is an occupational scheme then the
FSA's rules will be as now—which is largely confined to
the regulation of fund managers and to market confidence and consumer
awareness issues. However the regulatory issues identified above
will still need to be addressed.
27. The Pensions Commission suggests that
it will take at least four years to introduce a new scheme. The
Government, consumers, regulators and the industry will need to
consider the best way to approach any transitional period.
F. ANALOGIES
WITH THE
INTRODUCTION OF
STAKEHOLDER PENSIONS
28. Stakeholder pensions were introduced
in 2001 and are personal pension plans, therefore we have regulatory
responsibility for their sales and marketing. They can be sold
in a number of ways—a full advice process, Basic Advice,
through a decision tree or by direct offer—and the approach
taken is a commercial decision for firms.
29. Although the objectives of the proposed
NPSS and of stakeholder pensions are similar (providing consumers
with low-cost pensions through the workplace), there are a number
of key differences in the way the pension is delivered to consumers.
The regulatory response is therefore likely to be different. The
key differences can be summarised as follows:
— Stakeholder pensions do not require
employers to match contributions.
— Stakeholder pensions are sold mainly
through financial advisers, either direct to consumers or through
the workplace.
— Consumers face a wide choice of stakeholder
pension product providers who have different service and product
propositions.
— Although all stakeholder pensions
must have a default fund, some offer a vast choice in investment
funds.
30. By the end of 2004 there were 2,344,000
stakeholder pensions in force with an annual premium value of
over £1.8 billion. The table below shows the sales of stakeholder
pensions since their inception in 2001.
| Number of new
contracts (000)
| Value of new
contributions (£m)
|
| 2001 | 256 | 343
|
| 2002 | 373 | 595
|
| 2003 | 285 | 486
|
| 2004 | 265 | 462
|
| 2005 | 164 | 427
|
| |
|
31. In April 2005 we introduced a streamlined Basic Advice
regime for the regulation of advice on the sale of the Government
suite of "stakeholder" savings and investment products.
It was designed to support firms' ability to sell stakeholder
products, including pensions, more cost effectively, including
to lower-income consumers.
32. We have already begun a post-implementation review
of the Basic Advice approach to understand better how the market
is developing. In particular we are exploring with the industry
and its representatives the reasons for their entering, or not
entering, the Basic Advice market. We are also considering the
potential impact of the Markets in Financial Instruments Directive
(MiFID) on the Basic Advice regime.
G. FINANCIAL CAPABILITY
33. We have a statutory objective to promote public understanding
of the financial system. Our financial capability work contributes
to the objective. We provide consumer information and interactive
tools to help consumers get to grips with their financial affairs,
for example by knowing which questions to ask, where to go to
get further help and being aware of the risks associated with
their decisions. We aim to help consumers obtain the information
they need to enable them to make informed decisions about their
personal finances.
34. An example of our consumer information work is the
recent Pensions made clear campaign. This national campaign
urged consumers to review their pension arrangements before A-Day
and ensure they understood what the changes could mean for them.
It also covered messages about decisions on the State Second Pension.
35. The objective was to direct consumers to the campaign
website at www.fsa.gov.uk/pensions; this website has received
125,000 visits so far. We also produced a series of guides and
factsheets to support the campaign; so far consumers have ordered
over 10,000.
36. We have conducted a feedback survey to see if people
found our information useful. This showed that, of the people
we spoke to, 72% felt more confident to ask questions or find
more information about pensions and 73% felt better able to make
an informed decision about their retirement planning as a result
of our information.
37. We have put in place a framework to help deliver
a market with financially capable consumers. As part of this financial
capability strategy there are seven priority projects, one of
which is to reach people through the workplace. We have successfully
trialled the delivery of financial education to employees in the
workplace, through the provision of generic advice seminars, leaflets
and access to one-to-one consultations with an adviser.
38. During 2006-07 this programme will expand to deliver
material and invitations to seminars to 200,000 employees, with
15,000 subsequently attending one-hour seminars. These sessions
will be delivered by trained personnel and will cover the basics
of budgeting, managing debt, planning ahead (including the role
of pensions) and the types of financial products they might need.
The aim is that by 2010, four million employees will have had
access to some form of financial information through their workplace,
with half a million having attended a seminar. We would expect
any NPSS that may be introduced would generate considerable interest
from employees in financial information provided to them in their
workplace.
H. CONCLUSION
39. We will continue to work closely with Government
to ensure that the appropriate regulatory regime is in place to
address the risks associated with the introduction of any NPSS
proposals.
April 2006
| 
