The defined benefit (DB) pension space has caused financial advisers considerable trouble over the past couple of years, not least because of rising professional indemnity (PI) insurance premiums.
This has prompted many to either scale back their DB transfer operations or to exit the sector altogether.
But according to the Financial Conduct Authority (FCA), consumers are the ones suffering most.
As employers are choosing to no longer offer DB schemes, the regulator warned there was an increased risk people would experience lower living standards and have inadequate savings.
“The prospect that consumers may not get a retirement income that meets their needs or expectations remains the central harm for the sector,” the watchdog said in its Sector Views 2020 report.
And studies over the last five years have proved just that.
In 2016, the Pensions and Lifetime Savings Association (PLSA) found that the majority of people in the UK have a greater than 60% chance of seeing their living standards fall significantly when they retire.
And as many as 15.1 million adults in 2017 were not retired, but at the same time, were not saving into a pension, according to another FCA study.
Change on the horizon?
“Since the introduction of pensions freedoms, more consumers are entering drawdown and having to make complex investment decisions,” the FCA added.
“Unsuitable products or investment choices can cause significant consumer harm.”
According to the regulator’s 2019 retirement income data, unsuitable DB transfers could result in pensioners collectively losing up to £20bn ($26bn, €24bn) worth of guaranteed retirement income over just five years.
But the DB landscape is changing, as the number of pension transfers from DB to defined contribution (DC) schemes has been steadily decreasing since Q2 2018.
Whether that is to be attributed to players leaving the space or advisers being more cautious when recommending a transfer, numbers are going down sharply.
Between Q4 2017 and Q1 2018 34,738 transfers were made. This compares to 32,747 in Q2-Q3 2018, and 25,215 in Q4 2018-Q1 2019.
The FCA said the UK market could learn from the “mature” Australian DC superannuation industry, especially in the aftermath of the Haynes report.
The regulator said: “The Australian Royal Commission has identified several harms with the Australian system which could also emerge in the UK in time:
- Cost savings from economies of scale in providing and managing superannuation funds not being passed on to consumers;
- Poorly governed investments in alternative asset classes, leading to lower investment returns; and,
- High costs associated with the proliferation of small pots, created each time a worker changes jobs.”
Through the magnifying glass
Pensions, however, are not the only areas the FCA is going to tackle.
The burden left by the London Capital & Finance (LCF) scandal, with over 11,600 victims and £237m worth of investors’ money going into unregulated mini-bonds, has prompted the regulator to ban the promotion of such speculative vehicles to retail clients.
But this is the result of the current market conditions, said Adrian Lowcock, head of personal investing at Willis Owen.
“Record low interest rates have led many savers to look to investments to help make their money work harder for them, and that can be a good thing.
“However, the backdrop of low interest rates has meant that there have been some who have promoted offers which look fantastic on the surface, but in reality they were either frauds or the risks were not clearly explained.
“Investors should always take the view that anything that looks too good to be true probably is and approach with caution.”