4 Transparency and the effectiveness
of self-regulation
62. This chapter explores the role that communications,
transparency and self-regulation by the pensions industry can
play in aiding employers to understand the potential impact that
saving in particular pension schemes and funds could have on their
employees' retirement income.
Transparency of costs and charges
63. Many witnesses believed that the problems
associated with high costs and charges are exacerbated by the
way in which providers communicate charges to members.[62]
The form in which costs and charges are currently presented by
providers is not sufficiently transparent to enable employers
to understand the effects that charges can have on the size of
their employees' pension funds. Trade bodies, Government and other
stakeholders have been putting pressure on pension providers to
reduce charges and provide more transparency about all of the
costs and charges associated with their pension scheme.[63]
Engaging with employers
64. Employers' understanding of the level and
range of charges levied on their employees by pension providers
is currently low, although very large employers tend to have a
better understanding than smaller employers. A survey of employers
showed that 38% did not know the level of their company pension
scheme's Annual Management Charges (AMCs). Among small employers
(with 100 employees or less) the proportion was even higher, with
around 50% unaware of the level of their scheme's AMC. This is
particularly concerning because SMEs are likely to be charged
higher AMCs by their pension scheme provider.[64]
The NAPF said that awareness among micro, small and medium sized
businesses was poor, particularly about active member discounts
and flat rate charges. Indeed, some micro employers "assumed
that the charges being discussed would actually be applied to
the employers as opposed to the pension scheme members".[65]
65. EEF believed that charging regimes in pension
schemes were currently a "major barrier to delivering good
pension outcomes" and that the lack of knowledge and understanding
among employers about charges and their effects explained why
pension providers have been able to continue charging high amounts.
EEF argued that employers are not equipped with the necessary
tools to "solve the problem" of high charges because
they often need to rely on advice when choosing schemes and many,
especially SMEs, do not have "the resources, expertise or
time, to verify the advice they have been given." It suggested
that the Government should put "obligations on the pension
industry to improve transparency" and should give "The
Pensions Regulator responsibility for maintaining a register of
schemes that meet the current criteria for auto-enrolment and
developing a tool to help employers/trustees make sense of charges/costs."
[66]
Self-regulation and transparency
of costs and charges
66. Industry bodies have recently made some progress
towards encouraging their members to provide greater transparency
of costs and charges.
- The Investment Management Association
(IMA) published guidance on disclosing fund charges and transaction
costs in September 2012. The guidance details the IMA's expectations
of enhanced disclosure of costs and charges to investors (including
pension scheme members). It expected its members to comply with
the guidance by March 2013 at the latest.[67]
- The National Association of Pension Funds
(NAPF) launched an industry code of conduct on transparency of
charges in November 2012.This encourages anyone providing services
or advice directly to employers in setting up or administering
a pension to set out the charges levied on funds and the potential
impact they might have over time on the final size of pension
pots.[68] The NAPF intended
the requirements of the code to be active from January 2013, and
from April 2013 the information will be put on an online web-tool
to allow employers to make comparisons between different providers.
- The Association of British Insurers (ABI)
published an industry agreement on the disclosure of pension charges
in January 2013, to be phased in between 2014 and 2015, in which
all signatories will give an undertaking that their pension scheme
costs and charges will be clearly presented to customers. The
specific details of the disclosure requirements are currently
being worked out between the industry and the ABI.[69]
67. There was broad approval for these codes
and guidance and witnesses agreed that it was very important that
comparison tools were available to enable employers and employees
to see the potential impact of costs and charges on final retirement
income.[70] However,
some witnesses believed that the timetable for these improvements
would mean that many employers would have already made the key
decisions about their auto-enrolment pension scheme before the
guidance comes into force, as employers are likely to start making
decisions about which auto-enrolment scheme to use 12 to 18 months
before their staging date.[71]
68. Other witnesses were openly sceptical of
the guidance and codes being produced by industry bodies. Michael
Johnson argued that: "We need to be very clear that codes
of conduct are essentially voluntary rather than mandatory, and
therefore, in my mind, it raises the question as to whether the
trade bodies are simply trying to buy time."[72]
Joanne Segars of the NAPF denied that the code of conduct they
had produced was a ploy to buy time. She called Mr Johnson's remarks
"rather cynical".[73]
69. We welcome the work done
by pensions industry bodies to encourage greater transparency
in communications about costs and charges and their potential
impact on retirement income. However we are concerned about the
lack of enforceability of these codes and the lengthy timeline
for implementing some of them and for producing online comparison
tools. We are particularly worried by the possibility that the
facility for employers to compare scheme charges will not be available
until after many have already made their decisions regarding auto-enrolment.
70. We recommend that the
Government review the levels of transparency across the pensions
industry early in 2014. If it concludes that employers are still
prevented by a lack of transparency from making informed choices
about the potential impact on their employees of saving in different
pension schemes, we recommend that it imposes a charge cap on
auto-enrolment qualifying schemes or on the schemes which are
not complying with the transparency codes and guidance issued
by industry bodies. We further recommend that consideration is
given to penalties and enforcement if the industry fails to self-regulate
effectively within the next three years.
Self-regulation and annuity purchases
71. After the age of 55, people have the option
to convert their pension pot into a retirement income. One way
of doing this is through purchasing an annuity (though it can
be achieved through other means, such as income drawdown). Annuities
are contracts between an individual and their annuity provider
(often an insurance company) in which the provider agrees to pay
an income to the individual for the rest of their lives. Annuities
can consist of a (nominal) level income or can rise yearly by
an agreed percentage or in line with an inflation index. Annuities
can be paid solely to an individual, ceasing payment on that individual's
death, or can pay out to an annuitant's dependant, although these
joint annuities pay out at a lower rate.
72. Annuities do not have to be purchased from
the same provider with whom an individual has saved into a pension
scheme, but many people are unaware that they have the option
to use other annuity providers.
73. Witnesses expressed concerns about the lack
of transparency around annuity pricing and the lack of knowledge
of the option to "shop around" at the point of retirement.[74]
People who purchase an annuity from a provider other than their
original fund-holder can receive a substantially higher annuity
income; in some cases as much as 20% more.[75]
People who suffer from ill-health (and are therefore eligible
for enhanced or impaired-life annuities which pay out at higher
rates in expectation of reduced longevity) could see an increase
in annuity income of up to 40% from shopping around.[76]
It is important to note, however, that in some cases the best
annuity deal will be offered by an individual's original provider.
Michael Johnson highlighted that a third of people over age 55
have never heard of the option of shopping around, and that 70%
do not even fully understand what an annuity is.[77]
The pensions industry has been working to improve communications
with pension scheme members to raise awareness about the importance
of shopping around for a better deal. As a result, the proportion
of members purchasing an annuity from a provider other than their
original fund-holder has increased from 35% of annuity purchases
in 2008 to 46% in 2011.[78]
However, this increase is not considered sufficiently significant
as many people are still missing out on the most favourable annuity
rates.
74. The industry is aware that a problem persists.
The ABI published a Code of Conduct on Retirement Choices in March
2012, requiring all ABI members to "ensure that customers
are equipped with the information they need to understand their
options, shop around and make an informed decision about their
income in retirement." The ABI intends to:
[...] publish the annuity rates of all our members,
regardless of whether they are competing for annuity business
in the open market or not. This will allow customers to understand
where their provider fits into the wider market, and allow commentators
and the media to better understand how the annuity market and
how rates are developing.[79]
The deadline for compliance with this Code was 1
March 2013.[80]
75. The FSA also announced in January
2013 that it would be conducting a thematic review "exploring
the risk of detriment that consumers may face as a result of not
shopping around when purchasing an annuity." This review
will be taken forward by the Financial Conduct Authority (FCA)
from April 2013 and will "involve a pricing survey of all
annuity providers, and will compare the rates available to consumers
through a range of distribution channels, including rates available
through the Open Market Option and those only available to existing
pension policyholders."[81]
The FSA intends the review to take account of the implementation
of the ABI's Code of Conduct on Retirement Income.
76. We believe that the industry
is failing pension scheme members when they convert their pension
funds into annuities. Purchasing an annuity from a provider other
than the one which holds an individual's fund could increase their
retirement income by as much as 20% to 40%. However many people
are unaware that they have the option to shop around for an annuity.
We recognise that the industry is working to improve take up of
the option to shop around and we welcome the ABI's Code of Conduct
on Retirement Income Choices and the FSA's thematic review of
annuities.
77. Nonetheless, we recommend
that the Government and regulators institute a mandatory system
whereby, when consumers come to purchase an annuity, their pension
provider is required automatically to supply them with a comprehensive
breakdown of all the different annuity rates available to them
from different providers, including options and rates for enhanced
and impaired life annuities. We also recommend that, as a last
resort, the Government considers taking steps to separate the
function of providing pensions schemes from that of providing
annuities.
62 Ev 146 Back
63
Qq 2 [Mr Pitt-Watson], 149, 156, 237 [ TPAS] Back
64
Ev 146 Back
65
National Association of Pension Funds, B&CE, Telling employers
about DC pension charges: research, September 2012, p 14. Back
66
Ev 146 Back
67
Investment Management Association, Enhanced disclosure of fund
charges and costs, September 2012. Back
68
National Association of Pension Funds, Pension Charges Made
Clear: Joint Industry Code of Conduct. Telling employers about
DC pension charges, November 2012. Back
69
Association of British Insurers, Agreement on the Disclosure
of Pension Charges and Costs, January 2013. Back
70
Q 206 [Mercer], Q 355, Ev 160 Back
71
Q 256 [Which?], Q 318 [Pensions Minister] Back
72
Q 16 Back
73
Q 99 Back
74
Qq 21, 125 Back
75
The Pensions Institute, National Association of Pension Funds,
Treating DC scheme members fairly in retirement?, February
2012. Back
76
Ev 175 Back
77
Q 21 Back
78
Michael Johnson, Centre for Policy Studies, Put the Saver First,
June 2012, p 184. Back
79
Ev 116 Back
80
Association of British Insurers, Code of Conduct on Retirement
Choices, March 2012. Back
81
Financial Services Authority, Insurance conduct supervision
newsletter, January 2013, p 3. Back
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