Pension costs and transparency Contents

Conclusions and recommendations

Introduction

1.There should be no cause for the complacency about the pensions industry’s performance on transparency that was evident in the ratings the Ministers gave it. We are not convinced that any part of the industry scores above half marks on transparency. (Paragraph 7)

Workplace pensions

2.The charge cap of 0.75% on defined contribution pension schemes used for automatic enrolment does not appear to have caused charges to rise to the level at which it was set, with average charges being between 0.38 and 0.54% depending on the scheme type. But not all charges are covered by the cap, and the full extent of charges outside the cap is not known. That makes it impossible to know how well the cap is working in practice. (Paragraph 19)

3.We are concerned that permitting a combination of a flat fee plus a percentage of funds under management charge has the potential to completely erode small dormant investment pots. If this were to happen, many savers’ confidence in automatic enrolment could be fatally undermined. (Paragraph 20)

4.We recommend that DWP review the level and scope of the charge cap, as well as permitted charging structures, in 2020. The review should consider preventing flat fee charging structures being applied to dormant pension pots and revisit measures to proactively consolidate smaller pots. (Paragraph 21)

5.In most cases, members of defined benefit pension schemes are not directly impacted by the costs or investment decisions of their scheme. However, in an environment in which many defined benefit schemes are in deficit, being closed to new members or reducing member benefits, it is important that the same scrutiny to value for money is given by trustees as it is for defined contribution schemes. Better scrutiny of value for money in defined benefit schemes will either justify or avoid the need for the often difficult decisions being taken about the future of pension schemes. (Paragraph 25)

6.Independent Governance Committees are now established and fulfilling a necessary role. It is the right time for a comprehensive review to take place. We note that the FCA is now planning this review, having previously postponed doing so. In the light of the concerns which are being expressed about the work of some Independent Governance Committees, the FCA must not postpone this any further. (Paragraph 34)

7.We have received worrying evidence that some trustees are making investment decisions without a clear understanding of how much those decisions cost. It does not appear that these are isolated cases. We welcome the proposals put forward by the Institutional Disclosure Working Group to address this through increased costs transparency. Now that the Institutional Disclosure Working Group’s successor, the Cost Transparency Initiative, has published the disclosure templates, the measure of success will be how quickly and comprehensively they are adopted. (Paragraph 46)

8.We recognise that there is not a perfect one-size-fits-all model for reporting costs and that developing templates is an ongoing process. The Minister for Pensions and Financial Inclusion warned the industry that, if they fail to embrace the Cost Transparency Initiative, the Government would respond by legislating. We are not convinced that this will provide sufficient incentive to achieve a high take up through voluntary disclosure. (Paragraph 47)

9.We recommend that the Government bring forward legislation to make the disclosure templates mandatory for both defined contribution and defined benefit schemes. (Paragraph 48)

10.We recommend that, to avoid poor quality and untimely data, the disclosure templates are supported by an independent verification process. Compliance should be overseen by the relevant regulators, who should be given any additional powers they might need to tackle non-compliance. (Paragraph 49)

11.We recommend that schemes should be supported to collect additional information if the template does not fully cover their individual scheme needs. This information should be available for scheme members as part of the wider information provided on value for money including information on exit charges and any other costs associated with transfer of their pot. The FCA should explore the creation of a public register of asset managers’ compliance records with reasonable data requests. (Paragraph 50)

12.There is no agreed definition of what is meant by value for money in the pensions industry. Although individual schemes will need to vary their value for money goals, without agreed definitions it is not possible to make effective comparisons. (Paragraph 60)

13.We fully recognise that value for money is not solely about costs, but costs inevitably form an important part of the equation. Complexity and layers of intermediaries mean that many trustees do not have access to suitable information to make judgements about the costs of managing their schemes. Schemes should clearly communicate their interpretation of value for money, and how it will be achieved, to their members (Paragraph 61)

14.The Competition and Markets Authority’s Investment Consultants Market Investigation final report, published during the course of this inquiry, contains welcome proposals to address conflicts of interest and cosy relationships between schemes and asset managers, and to ensure that trustees are actively seeking value for money. (Paragraph 62)

15.We note that the Government legislated in February 2018 to require occupational defined contribution schemes to publish their assessment of value for members and that all schemes will have published their assessment by November 2019. (Paragraph 63)

16.We recommend that the Government reviews the initial impact of requiring occupational defined contribution schemes to publish their assessment of value for members in 2020. The review should assess whether or not this requirement leads to better scheme focus on achieving value for money and better communication to scheme members about value for money. (Paragraph 64)

Investment strategies

17.We have not received compelling evidence that higher-cost providers provide better performance. However, there are justifiable reasons, depending on value for money goals, for some schemes using higher-cost providers, including investment in infrastructure, diversifying portfolios and matching long-term investments to long-term savings. We are encouraged that the Minister is seeking solutions better to enable investment by defined contribution schemes in infrastructure and other illiquid assets whilst not fundamentally undermining the charge cap. (Paragraph 77)

18.We recommend that the FCA should introduce requirements for contract-based schemes, corresponding to those introduced for trust-based schemes, to report on environmental, social and governance factors as proposed in the FCA’s consultation on Independent Governance Committees: extension of remit. (Paragraph 78)

Transparency for individuals

19.A non-commercial pensions dashboard will be a welcome, if overdue, additional tool to provide transparency to individuals and help them plan how they use their pension funds. We welcome the Government’s ongoing commitment to the project. The Government should now take a leading role in ensuring that schemes adequately prepare their data ahead of launch and that the project delivers the full benefits to consumers. (Paragraph 86)

20.We accept that for a pensions dashboard to be launched in a timely manner, it will necessarily be limited at the outset. This should not be at the expense of any of the key data on an individual’s pension savings. (Paragraph 87)

21.We welcome that the Government has committed to including State Pension data in pension dashboards. We recommend that personal State Pension projections be included in the Pensions Dashboard at launch, as they form a key component of many individuals’ pension incomes. (Paragraph 88)

22.We recommend that by the end of 2019 the Government publish a timetable for the rollout of a non-commercial pensions dashboard. This should include key milestones, such as the date for pension providers to include their data on the pensions dashboard, as well as target timescales for phases beyond the initial launch—for example, longer term plans to enable consumers to make value for money comparisons through the pensions dashboard. With consent, authorised providers of financial services should be able to include an individual’s pensions dashboard data within their own applications. (Paragraph 89)

23.We recommend that the pensions dashboard should feature retirement income targets to ensure the information is meaningful to its users. (Paragraph 90)

24.The pension freedoms had two important components: the right to choose and the guarantee of guidance to ensure that choice is an informed one. We are concerned that firms might be able to “game” guidance opt-out requirements and nudge individuals into not receiving guidance which they were promised. (Paragraph 97)

25.We welcome progress by the Financial Conduct Authority and Money and Pensions Service in testing approaches to ensure that consumers have received appropriate guidance or opted-out of receiving guidance. We recommend that individuals should only be able to opt-out of guidance through an active decision communicated to an impartial body, such as the Money and Pensions Service. This should not be a process which needs to be repeated for every pension pot an individual has. (Paragraph 98)

26.We recommend that for any transaction to be deemed valid, the relevant upfront costs and any further charges should be detailed on the front page of the product and the investor should be required to specifically sign that they are aware of those charges and have agreed to them. This should be the case for exiting a scheme as well as for investment into a new or additional scheme. Investors should also be given a 14-day cooling-off period where transactions can be reversed without detriment to the investor. (Paragraph 99)

27.Pension Wise has been successful in delivering guidance to those who use it and enabling these pension savers to make well informed choices. The high level of satisfaction with Pension Wise demonstrates the value of a service which is yet not achieving its potential reach. (Paragraph 103)

28.We recommend that the new Money and Pensions Service should outline in its forthcoming strategy how it will increase usage of Pension Wise. (Paragraph 104)

29.We welcome the FCA’s proposals for the investment pathways. These are in line with the recommendation we made in our Pensions Freedoms report last year—namely, that any provider offering drawdown should be required by FCA rules to offer a default solution that is targeted at their core customer group. (Paragraph 110)

30.The investment pathways must not be a substitute for guidance, which is still required to help individuals determine which product is right for them. For example, it is not clear to us how, under the proposed investment pathways, an individual who states that they plan to use their money to set up a guaranteed income is supported to do so. Many people who have passively built up retirement savings through automatic enrolment would likely need support through advice or guidance if they wanted to make an informed choice on purchasing a product which provides a guaranteed income. (Paragraph 111)

31.We recommended in our Pensions Freedoms report a 0.75% charge cap on default decumulation pathways. The FCA told us that it would prefer to see if market-consistent tools work and, if those fail, introduce a charge cap. This conversation is a near repeat of those our predecessor Committee had with the FCA about schemes used for automatic enrolment savings, which are now the subject of a charge cap. The FCA would send a simpler message to the industry by setting a charge cap now for investment pathways—rather than issuing vague threats to the industry. (Paragraph 112)

32.We recommend that the FCA implement a robust monitoring programme for the effectiveness of the investment pathways, including value for money comparisons with other available products, in partnership with any other DWP monitoring work of the pension freedoms. (Paragraph 113)

33.We recommend that the FCA clearly set out how people who have passively built up saving through automatic enrolment will be supported to make and carry out an informed choice from the available decumulation products and not solely directed to drawdown products. (Paragraph 114)

34.We recommend that a 0.75% charge cap should be set on decumulation products available through FCA decumulation pathways from the outset. (Paragraph 115)

35.Many Independent Financial Advisers provide good value for money for pension customers. However, the number of people paying for good value advice is low. People who are not able to access good advice need guidance and effective protection from pension scams, which can have life changing impacts. Scams not only harm the individual but cause wider damage to the industry by discouraging potential savers. Scams are not a necessary consequence of the pension freedoms. (Paragraph 121)

36.We were concerned to learn that the FCA’s dedicated scams team only consisted of approximately 10 people out of 3,700 FCA staff. We recommend that the FCA review whether it dedicates sufficient resource to combat active pension scams, prevent new pension scams and protect individuals. (Paragraph 122)

37.We recommend that the Financial Conduct Authority’s list of unauthorised firms be expanded into a widely publicised database. This database should be regularly updated by the range of governmental organisations involved in pension scams and act as a co-ordinated early warning system. (Paragraph 123)

38.We and our predecessor have twice asked the Government to improve its monitoring and reporting on progress of the pension freedoms and default guidance, yet there remains an absence of a regular authoritative assessment of the policy. We hope for success at the third time of asking. (Paragraph 126)

39.We recommend that the Department for Work and Pensions publishes an annual report on pension freedoms and the guidance guarantee. It should make use of the existing annual release of Pension Wise user evaluations and existing data produced by the regulators, as well as data on competition in the industry’s markets and the effectiveness of newer policies such as the midlife MOT. The annual report should also give a regular aggregate assessment of the policy and industry. (Paragraph 127)

40.In 2019/20, those with earnings below the personal allowance and contributing at statutory automatic enrolment rates will see a difference of around £65 per year between net pay and relief at source tax relief arrangements. Over a lifetime of pension saving this will be a significant amount to many people and a significant proportion of their pension savings built up through automatic enrolment. The Government says that it would cost too much to put this right. In doing so, it risks damaging faith in the system, by perpetuating arrangements which cause individuals to lose significant sums through decisions they did not make. (Paragraph 134)

41.We recommend that the Government resolve the discrepancy between net pay and relief at source tax relief arrangements as a matter of urgency. (Paragraph 135)





Published: 5 August 2019