Pensions Bulletin 2019/30
1 August 2019
It is largely as you were at the DWP
Somewhat surprisingly, the ministerial team at the DWP has emerged largely unscathed following the clearout, mainly at Cabinet level, after Boris Johnson became Prime Minister last week.
Amber Rudd remains Secretary of State, whilst Guy Opperman remains Under Secretary of State for Pensions and Financial Inclusion. But there have been changes elsewhere.
The official list of Government ministers has now re-emerged having been taken down as the cull began.
The news from the DWP provides for welcome continuity in what is a predominantly domestic-facing Department with limited Brexit impact, deal or no deal.
And at least the Pensions Bill, along with other initiatives, won’t need to be delayed whilst a new ministerial team gets up to speed. But quite when we will see the Bill and what it will contain remains a mystery, with Frank Field writing to Guy Opperman recently to ask about the timing of the Bill and whether it will include measures to regulate the nascent DB consolidation providers.
Contingent charging for DB transfer advice to be banned
On Tuesday, the Financial Conduct Authority proposed a ban on contingent charging for DB pension transfer advice, set out a package of measures to protect consumers of non-workplace pensions and published its final rules and guidance on the final tranche of remedies arising from its Retirement Outcomes Review, including the introduction of investment pathways to assist those entering drawdown.
This first article looks at the contingent charging proposal. The following two articles examine the other measures.
The proposed ban on contingent charging is a result of the further work that the FCA promised to undertake when last October it finalised its latest set of rules for financial advisers operating in this market but declined to take any action for the time being on contingent charging (see Pensions Bulletin 2018/40).
The FCA found, through undertaking a market-wide collection of data, that 69% of all advice resulted in a recommendation to transfer – significantly higher than the FCA expects, given its view that, for most consumers transferring is not in their best interests.
The FCA estimates that if the levels of unsuitable advice found in its various reviews are replicated across the entire DB transfer advice market, the harm of unsuitable advice on DB transfers is in the range of £1.6bn to £2bn each year.
The ban is to apply unless consumers have specific circumstances that mean a transfer is more likely to be in their best interests.
Additionally, in an effort to address the conflicts of interest that arise when a financial adviser advising on a DB pension transfer stands to receive ongoing fees, the FCA is proposing that advisers will be required to demonstrate why any scheme they recommend is more suitable than the consumer’s workplace pension scheme.
The FCA is also taking the opportunity to consult on other aspects of the advisory process in relation to pension transfers. These include introducing “abridged advice” – so that low cost advice can be provided to customers who should not transfer – improving how charges are disclosed and setting out how advisers should demonstrate customers’ understanding of the advice.
In addition, the FCA has also asked questions on whether all schemes should offer partial transfers, whether the £500 pensions advice allowance, currently available only in respect of DC schemes, could also be deducted from DB schemes, and whether there should be a mandatory guidance service for members (possibly provided by trustees). Changes in these areas, which are outside the FCA’s remit, would require changes to legislation.
The consultation runs until 30 October 2019 and the FCA intends to finalise its proposals by means of a Policy Statement in the first quarter of 2020. There is also a timetable set out for when the new measures may come into force – the contingent charging ban is to come in within a week of the new rules being settled, subject to a three-month transition.
The FCA has now had a number of goes at seeking to improve how the pension transfer advice market is regulated, as concerns continue to mount, including amongst MPs, that the way that much of the advice market works is simply not fit for purpose.
This latest iteration, aimed at driving down the number of people giving up valuable DB pensions when it is not in their interest to do so, is the strongest yet.
We welcome these proposals. However, it is likely to reduce the overall size of the advisory market and the number of members taking advice. We hope that it will also facilitate the expansion of that part of the market that charges purely for the work done.
FCA looks at competition in the non-workplace pensions market
The second part of the FCA’s package looks at the extent to which consumers of non-workplace pensions are engaged with their pensions decisions and the charges they face from providers and pension products, and how this might be improved.
Analysing the response to its Discussion Paper of February 2018 (see Pensions Bulletin 2018/06), the FCA has concluded that the non-workplace pension market shares many key similarities with other pension markets that lead to weak competitive pressure.
Charges are highly complex across the market, with older products and smaller pots attracting higher charges, and similar consumers paying materially different charges for broadly comparable products. There is little consumer engagement, many assuming they have selected a “standard” investment, and little switching between pension products. Price competition is weak. The FCA is also concerned about the high level of cash investment.
The FCA goes on to propose some potential remedies. These include:
- Requiring firms to provide one or more ready-made investment solutions with lifestyling to align with consumers’ broad objectives
- Requiring non-advised investments in cash to be an “active decision” by consumers
- Requiring firms to present all charges information as either administration charges or transaction costs, and to report standardised charges data on a regular basis to an independent body (such as the FCA), which would collate and publish the information; and
- Proportionate introduction of independence governance
The FCA seeks views by 8 October and aims to issue a consultation paper in the first quarter of 2020 on its simplification and disclosure remedies. Around the same time it will issue separate papers on the effectiveness of Independent Governance Committees and on a proposed value for money framework for pensions, developed with the Pensions Regulator.
Many of the FCA’s proposals are similar to those applicable to workplace pensions. This is good news for consumers, many of whom will likely have a combination of workplace and non-workplace pensions as they change jobs throughout their career. A consistent approach to charges disclosure will help with their understanding in this complex area.
“Investment pathways” for drawdown customers to be introduced
Following consultation in January, the FCA has published its final rules and guidance arising from its Retirement Outcomes Review. The principal purpose of these is to help non-advised drawdown consumers who struggle to make investment decisions. The FCA also intends that its new requirements will promote competition by making the actual charges paid by drawdown consumers clearer and comparisons easier.
Its new rules and guidance, which are little changed from those on which it consulted (see Pensions Bulletin 2019/04):
- Introduce “investment pathways” for consumers entering drawdown without taking advice
- Ensure that consumers entering drawdown only invest mainly in cash if they take an active decision to do so; and
- Require firms to send annual information on all the costs and charges paid over the previous year to consumers who have accessed their pension
All these changes are to come into force on 1 August 2020.
Decumulation has for too long been the poor relation in the regulatory architecture governing how consumers can access their retirement pot post freedom and choice. We are not surprised at the strong support that the FCA received for its proposals impacting the contract space. How long will it be before we see similar proposals for the trust space?
DWP consults on trustee oversight of investment consultants and fiduciary managers CMA remedies
The DWP is delivering on its promise back in March to introduce regulations to put the Competition and Markets Authority’s remedies, insofar as they apply to trustees of occupational pension schemes, into the main body of pensions law (see Pensions Bulletin 2019/10). This follows the CMA finalising its Order in June (see Pensions Bulletin 2019/23).
The regulations on which the DWP is consulting largely replicate relevant aspects of the CMA Order and in some respects go further. As such, they will:
- Require trustees, subject to certain limited exceptions, to carry out a tender process for fiduciary management services and set objectives for their investment consultants; and
- Allow the Pensions Regulator to oversee the requirements via submission of additional information in the scheme return
The Pensions Regulator has also published for consultation a suite of guides to assist trustees in complying with the new “tougher rules on investment governance”.
Consultation on the DWP’s regulations closes on 2 September and the DWP intends to lay the finalised regulations around the turn of the year, with them coming into force on 6 April 2020. Consultation on the Regulator’s guides closes on 11 September.
Separately, it is now expected that HM Treasury will consult later this year on changes to existing regulations, in response to the CMA’s recommendation to bring investment consultants within the remit of the Financial Conduct Authority.
This consultation signifies that the CMA remedies are here to stay. We are not quite sure how an investigation into potential anti-competitive practices in the fiduciary management market has morphed into “tougher rules on investment governance” but it has. The short timescales for the consultations will be a challenge.
Government responds to the Intergenerational Fairness report
It rejects three recommendations affecting older people, citing previous commitments to the triple lock for State Pensions and Winter Fuel Payments for the duration of the current Parliament, and confirming its policies on free bus passes and no national insurance contributions for those over State Pension Age.
The Select Committee’s recommendation on phasing out free TV licences has been taken forward, not by the Government, but by the BBC, which made the decision on licensing fee concessions, that from June 2020 free TV licences will only be given to those aged 75 or above who are in receipt of pension credit.
The Government’s response to the recommendations, in respect of measures impacting older people, is not a surprise. Perhaps the response “the Government is disappointed that the BBC will not protect free television licences for all viewers aged 75 and over”, is just one of many titbits showing that the Government’s energy for change might be focussed elsewhere.
National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019
The Bill that applies employer national insurance contributions to termination awards that exceed £30,000 and income from sporting testimonials over £100,000 (see Pensions Bulletin 2019/17) has now received Royal Assent.
The intention was that the provisions of the National Insurance Contributions (Termination Awards and Sporting Testimonials) Act 2019 should operate from 6 April 2020. We are not aware that this has changed, but HM Treasury will need to make regulations to activate these provisions.
Pan-European personal pension scheme regulations published
New rules on the pan-European personal pension product (PEPP) have now been published in the EU’s Official Journal, marking the official date for providers of personal pensions across the EU to start preparing for this new regime (see Pensions Bulletin 2019/14).
The new Regulation will become applicable in two years when the first PEPPs are expected to come on the market.
This Pensions Bulletin does not constitute advice, nor should it be taken as an authoritative statement of the law. For further help, please contact David Everett at our London office or the partner who normally advises you.