FIMC has submitted views on the Second Pensions Commission Interim Report. The submission can be found here: FIMC submission 2nd Pensions Commission 140726
We think the Interim Report provides a very comprehensive and forensic analysis of the challenges the UK faces in building a fair and equitable, adequate, sustainable, and efficient pension system that works better for people currently not well served by the current system.
The work of the First Pensions Commission resulted in one of the few significant public policy successes of recent years through the establishment of autoenrolment (AE) and the NEST pension scheme. Millions of people that were not contributing to a pension are now doing so. NEST and charge caps which limited how much pensions, insurance, and investment firms could extract from people’s pensions introduced some real competition and value into the private pensions market for the first time.
But, as the Second Pensions Commission rightly highlights, conditions have changed since the publication of the First Pensions Commission Report and the foundation provided by those reforms now need to be built on. We have high expectations that the work of the Second Pensions Commission will also result in major achievements given the right political will and effective collaboration between relevant stakeholders.
The key challenges
If the pensions system is to work for everyone[1] it should be: safe and resilient; sustainable over the long term; fair, equitable, and inclusive; efficient and fit-for-purpose so each £ of taxpayers’ money and pension savings works as hard as possible; and well-regulated and governed so people can have confidence and trust in it. It should address the low levels of pension provision amongst certain financially vulnerable groups.
FIMC identifies the following barriers and challenges to creating a pensions system that works better for people underserved by the current approach:
- Low pensions adequacy for millions of citizens, with a focus on specific vulnerable groups. The pension prospects for millions of people within certain groups – BAME households, women, carers (mostly women), lower income workers, and the self-employed – are stark.
- Unsuitability of the current pensions infrastructure for millions of underserved citizens who can’t benefit from the autoenrolment system.
- Chronic market inefficiencies, high costs and poor value for money caused by fragmentation, poor design, and conflicts of interest in the pension system.
- The transfer and individualisation of financial, market, and intertemporal risk within the system. For too many people, retirement outcomes are something of a lottery.
- Restricted availability of independent advice and information to support effective pension decisions. The financial advice market cannot meet the needs of people who are not commercially viable.
- Poor standards of governance, conduct of business and ‘consumer’[2] protection regulation, transparency in key parts of the private pensions system, and the need for enhanced scheme member engagement and representation in the pensions system.
- Managing macro and micro prudential risks in the pensions system including the emergence and application of AI.
- The fragmentation in the current ‘three peaks’ regulatory system – TPR, FCA, and PRA – which undermines effective regulation of the pensions market.[3]
- Environmental risks – both in terms of the harm caused by environmental degradation to the pensions and wider financial system and vice versa, the harm caused by the financial system to the environment.
- The potential impact of AI on labour markets and pensions policy.
The scale and nature of the challenges requires combined, concerted efforts on the part of Parliament, government, the regulatory system (The Pensions Regulator, Financial Conduct Authority, and Bank of England/ Prudential Regulation Authority), civil society organisations including trades unions, employers, and the financial services industry. We hope the work of the Second Pensions Commission will provide the necessary spur for these stakeholders to act.
Interventions
We made the following recommendations to address the key challenges identified in the Interim Report.
Tackling pensions inadequacy It does not make sense to leave the current hugely costly and inefficient pensions tax relief system unreformed. Capping the relief given to better-off pension savers could release resources to boost the pensions of financially vulnerable groups. For workers already in/eligible for AE, employers and employee contributions should be reviewed.
Unsuitability of the current pensions infrastructure for underserved citizens An equivalent to autoenrolment (AE) may be needed for carers and the self-employed eg. through the social security or tax self-assessment systems. Moreover, the current private pensions model (during both the accumulation and decumulation phases) is still generally structured to serve citizens who have already accumulated sizeable pension assets or citizens with comparatively stable, predictable work patterns who can expect to accumulate sizeable pension assets over time. The state could create state personal pension accounts with state top-ups paid into the accounts (in effect, creating a new prefunded version of the Additional State Pension.
Ensuring value for money Costs in the pensions system need to kept low so that each £ of taxpayers money and pension savings works as hard as possible. Yet, the combination of the so called Value For Money (VFM) reforms, the pressure to invest in high risk/high cost private assets, and weakening of the workplace pensions charge cap risks will allow the finance sector to extract more value from peoples pensions and could actually undermine pension outcomes. Remember, superior investment performance cannot be guaranteed. So, industry lobby claims that better performance would offset higher charges could mislead pension trustees and savers. Driving down charges should be a priority for the FCA and TPR.
Dealing with risk We have seen a significant transfer of risk and responsibility for retirement provision due to the closure of defined benefit schemes and growth in defined contribution (DC) type schemes. The variability of investment returns in the UK pension system means that retirement outcomes can be something of a lottery. Moreover, it is not just during the accumulation phase where we have seen the individualisation of risk; the pension ‘freedom and choice’ reforms means many savers risk running down their defined contribution wealth too quickly. TPR and FCA should prioritise working with stakeholders to progress the development of collective risk sharing accumulation approaches and supervising default decumulation options.
Access to independent advice and information There is a need for enhanced access to independent, objective financial advice and information to help citizens make effective decisions about pensions. Yet, the commercial financial advice market is unable to meet the needs of citizens with low or modest assets. Targeted support and simplified advice is unlikely to help and will just allow financial firms to, in effect, digitally cold call consumers with assets to sell them higher risk, higher cost investment products but with consumer rights to redress curtailed in the event of suboptimal outcomes.[4] An alternative to commercial financial advice is needed. The role of MaPS should be expanded to oversee the operation of a National Financial Advice Service (NFAS)[5] to provide and enable access to objective, free financial advice on pensions and savings to complement the commercial financial advice market.
Key regulatory matters Key regulatory issues need to be addressed to maintain trust and confidence in pensions – standards of governance, conduct of business and ‘consumer’[6] protection regulation, and transparency in the pensions system; prudential risks in the system as a result of weak regulation of life insurers that manage pension assets and the emergence of AI; specific risks in the pensions transfer market; and the fragmentation inherent in the current ‘three peaks’ regulatory system – TPR, FCA, and PRA.[7] We advocate for all matters relating to the prudential regulation of pension schemes be transferred to the PRA, with all conduct of business matters transferred to the FCA. This would allow TPR to concentrate on the critical role of ensuring schemes are run and administered effectively. Scheme member representation and engagement needs to be enhanced.
Pensions and the environment The risk to the pension system created by environment change requires special attention. Climate change and biodiversity loss pose significant risks to investment portfolios, both in terms of physical risks and policy risks related to the green transition. UK financial institutions are prohibited, quite rightly, by law and regulation from enabling money laundering, enabling sanctions evasions, financing terrorism, insider dealing, and misselling to consumers. It is remarkable that financial institutions continue to be allowed to finance, at scale, economic activities that harm the environment, so contributing to the existential threat faced by the financial system including pensions. Adopting a much more interventionist approach to aligning the behaviours of financial institutions, including pension schemes, with environmental goals should be a priority for TPR, FCA, and PRA.[8] Greater transparency is essential. The emphasis should move from narrative-based disclosures which just allow financial institutions to obfuscate to requiring schemes to disclose underlying data on the emissions financed in portfolios and calculate ‘portfolio greenness ratios’. ESG ratings providers are yet to be regulated but, to be fair, there are plans to do so. This regulation should be expedited.
The potential impact of AI on labour markets and pensions policy Pensions policy and labour markets are inextricably linked. If AI results in a reduction in the number of permanent jobs, a growth in ‘gig economy’ or part time jobs, or a rise in unemployment then this will clearly affect the role of AE (based around employment). Consideration will need to be given to future proofing pensions policy in some way against the potential impact of AI.
[1] Not just scheme members but other citizens, the real economy, and the environment.
[2] Consumer in this case covers employers scheme members and personal pension plan holders.
[3] Plus the other parts of the regulatory system – the Ombudsmen schemes and FSCS/ PPF
[4] (4) ‘Targeted support’ – FCA is designing the market to suit the interests of firms it regulates, not the consumers it is meant to protect | LinkedIn, ADVICE-GUIDANCE-CP27-17-FINANCIAL-INCLUSION-AND-MARKETS-CENTRE-SUBMISSION-290825.pdf, Financial Conduct Authority (FCA) Consultation Paper CP26/10 Simplifying the Pensions & Investment Advice Rules | The Financial Inclusion Centre
[5] Modelled on the previous government body The Pensions Advisory Service (TPAS).
[6] Consumer in this case covers employers scheme members and personal pension plan holders.
[7] Plus the other parts of the regulatory system – the Ombudsmen schemes and FSCS/ PPF
[8] Time for Action – Greening the Financial System | The Financial Inclusion Centre, The Devil is the policy detail – will financial regulation support a move to a net zero financial system? | The Financial Inclusion Centre