We are now three years on from the introduction of the pension freedoms and over five years on from auto-enrolment: two policies that changed the DNA of the UK pensions market.
Only now are we able to gauge some of their longer-term effects. 2018 has been, and will remain, a year in flux for pensions and retirement income advice.
The regulatory scrutiny has been building for some time. The inquiry into the pension freedoms, prompted by concerns that people will spend at such a rate they will leave themselves impoverished in old age, placed the regulator and the profession in the spotlight. So did the work and pensions committee’s report on defined benefit (DB) transfers.
This momentum reached fever pitch last month. In the space of a week, the Financial Conduct Authority (FCA) issued three papers. These were a policy statement (PS18/6) on advising on pension transfers; a new consultation on improving the quality of pension transfer advice; and a summary of findings of a review of non-advised drawdown pension sales. They will inform the retirement outcome review final report. The regulatory journey in this area is far from over.
Changes to be made
The policy statement ‘advising on pension transfers’ contains the final rules and guidance, some of which came into force on 1 April 2018. Others, such as the transfer value comparator and the appropriate pension transfer analysis, will come into force on 1 October 2018. The FCA has taken sharp criticism from the work and pensions committee on pension transfers. It is therefore not surprising the FCA has confirmed the starting assumption for DB transfers (that a transfer will be unsuitable) will not change. People can take on substantial risks when they transfer from their final salary pensions, so having a cautious starting point is sensible.
But these rule changes are not the end of the story. The statement was accompanied by a new consultation (CP18/7) looking at substantial aspects of pension transfer advice. These included qualifications, guidance on how a pension transfer specialist should work with another adviser in a two-adviser model, guidance on the advice boundary for triaging services to prospective clients, a client’s attitude to transfer risk and contingent charging. This consultation should be a mandatory read for any firms advising on pension transfers, or those acting as pension transfer specialists.
The concern is the full picture of this complex piece of advice. The challenges it presents are not yet clear. It is plausible the consultation could shed light on further areas on which the regulator may act.
But pension transfers are just part of the story. The regulator is also continuing to look at the delivery of the pension freedoms, making sure consumer protection is as good as possible.
Boosting engagement and tackling the implications of non-advised drawdown are likely to be key components of the regulator’s final report and findings of its retirement outcomes review, due in the first half of this year. This report may also answer questions about the role of advice and guidance, and whether a boost in take-up of either or both could be achieved by various means.
As the regulation for this new environment begins to take shape, it is encouraging that The Pensions Regulator and the FCA have issued a joint call for input on their strategic approach. This hints they are aiming for a more coordinated and holistic approach to pension regulation.
Such an approach gives pension regulation the best chance of success over the longer term, in the hope it will support good choices and outcomes for customers for years to come.
Jon Greer is head of retirement policy at Old Mutual Wealth