Financial Inclusion and Markets Centre (FIMC) has responded to TPR’s consultation on its new five year Corporate Strategy. The submission can be found here: FIMC TPR Corporate Strategy 0626
FIMC supports TPR’s overall vision of people having a sustainable income in retirement and the supporting outcomes: Member Outcomes – Savings are secure; Better value; Pensions are fair; and Market outcomes – Well-run schemes; A sustainable and resilient market; A seamless and integrated system
We have a similar vision and outcomes for the pension system. We articulate this as follows: if the pensions system is to work for everyone[1] it should be: safe and resilient; sustainable; fair, equitable, and inclusive; efficient and fit-for-purpose; and well- regulated and governed.
The building blocks for such a system are not in place. Creating such a system requires identifying and addressing the structural issues and barriers in the current system that are likely to undermine the delivery of that vision and outcomes. FIMC’s analysis identifies the following barriers and challenges:
- Low pensions adequacy for millions of citizens, with a focus on specific vulnerable groups
- Unfairness and inequity in the system
- Unsuitability of the current pensions infrastructure for millions of underserved citizens
- Chronic market inefficiencies, high costs and poor value for money caused by fragmentation, poor design, and conflicts of interest in the system
- The transfer and individualisation of financial, market, and intertemporal risk within the system
- Managing macro and micro prudential risks in the system including due to the emergence and application of AI
- Standards of governance, conduct of business and ‘consumer’[2] protection regulation, and transparency in the pensions system
- The fragmentation inherent in the current ‘three peaks’ regulatory system – TPR, Financial Conduct Authority (FCA), and Prudential Regulation Authority (PRA)/ Bank of England[3]
- The need for enhanced engagement and representation in the pensions system
- Restricted availability of independent advice and information to support effective pension decisions
- 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
Of course, TPR cannot address those challenges on its own. The scale and nature of the challenge requires combined, concerted efforts on the part of government, all the regulatory authorities, civil society organisations including trades unions, employers, and the financial services industry.
Issues such as pensions adequacy, unfairness and inequity, and overall design of the pensions system and infrastructure are a matter for the Government and social policy interventions. But, TPR in collaboration with policymakers and the other regulators can make a major contribution to addressing the other challenges.
With regards to TPR’s role, the key points we made in our submission are:
- There are a number of major risks in the pension system which need to be better managed including: the emergence of AI; the growth in the pension transfer market run by poorly regulated life insurers;[4] the transfer of risk to pension savers and greater individualisation of risk within the pension system; weak governance standards and inherent conflicts of interest in the contract based pension market and the master trust sector; the push to get pension savers to invest more in poorly regulated and governed private assets which offer questionable value in terms of risk-adjusted returns; and environmental-related risks. Managing these risks is made more difficult due to the fragmented nature of the regulatory system.
- The nature of AI risks warrants a much more precautionary approach by financial policymakers and regulators, including TPR, than has been hitherto shown.
- If we want each £ of pension savings to work as efficiently as possible, then it is critical to keep a lid on the charges and fees levied by the pensions, insurance, and investment industry. Yet the Value for Money (VFM) agenda and push to get pension schemes to invest more in high cost, higher risk, poorly regulated and governed private assets could undermine value for money and unnecessarily expose pension savers to greater risks without improving outcomes. Driving down end-to-end supply chain charges in the pensions industry should be a priority for TPR and the FCA.
- The transfer and individualisation of risk is not conducive to effective policy making on something as critical as ensuring that the maximum number of citizens can look forward to a decent, sustainable income in retirement. In addition to objective financial advice, more progress needs to be made on developing well regulated, well governed arrangements for collectively sharing risk. TPR and FCA should prioritise working with stakeholders to progress the development of collective risk sharing accumulation approaches and supervising default decumulation options.
- 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. 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’.
- Managing the various elements of private pension regulation – consumer protection, conduct of business regulation, prudential regulation, and management of systemic risks – is shared between TPR, FCA, FOS, The Pensions Ombudsman, FSCS, PPF, and PRA/ Bank of England. To address the fragmented regulatory system, we advocate that 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.
- There is a need for enhanced access to independent, objective financial advice (not just ‘guidance’) to help citizens make effective decisions about pensions. The commercial financial advice market is unable to meet the needs of citizens with low or modest assets. This means there is a significant ‘advice gap’. Targeted support and simplified advice would weaken consumer protection and would not close the ‘advice gap’ in a safe way.[5] An alternative to market provision is needed. The role of MaPS should be expanded to oversee the operation of a National Financial Advice Service (NFAS)[6] to provide and enable access to objective, free financial advice on pensions and savings to complement the commercial financial advice market. We urge TPR to work with DWP, HMT, FCA, and MaPS to develop such a financial advice service.
[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 Financial Ombudsmen Service (FOS)/ The Pensions Ombudsman and Financial Services Compensation Scheme (FSCS) /Pension Protection Fund (PPF)
[4] The Matching Adjustment provision in Solvency II/UK allows insurers to create artificial capital to make their balance sheets look stronger than they really are.
[5] (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
[6] Modelled on the previous government body The Pensions Advisory Service (TPAS).