The provision of pensions flexibility and choice can be “the companion of complexity”, the Financial Conduct Authority has highlighted.

In a City Banquet speech at Mansion House, FCA chief executive Andrew Bailey explained that greater flexibility in the pensions market since the introduction of defined contribution schemes and options in the decumulation phase is “sensible” due to the increased uncertainty around working lives and longevity. However, “flexibility and choice can on occasion be the companion of complexity”, Bailey said.

To clarify this view, Bailey gave pension transfers as an example, stating that the transfer of a DB to a DC scheme “is one of the most complex transactions an individual can undertake”.

In addition to this, it was noted that as a result of greater retirement savings options, there is “a clear risk that the savings rate for retirement is for many people too low to meet their expectations.

“DC accumulation rates are typically lower than DB rates of the past, and this is compounded by low real interest rates. Auto-enrolment and workplace pensions help in this respect, but the challenge remains.”

In order to address this risk, the FCA has committed to assessing the advice market as a result of the increased flexibility with pension options. Bailey went on to explain that while its predecessor The Financial Services Authority’s Retail Distribution Review was a positive step with increasing professional standards in the market and preventing commission being awarded for recommending providers’ products, there are still “concerns about a gap in the advice market”.

“I think that gap is probably exacerbated by low interest rates, which mean that the cost of advice looks less favourable when compared to returns. And this probably has more of an effect in areas where the fixed cost of advice – which is inevitable – looks unfavourable relative to the smaller amount of investment involved.”

To address the advice gap, Bailey explained that the FCA is providing support to innovation in the advice market through Project Innovate and the Sandbox, and is working with the Treasury, with the help of practitioners, to undertake the review of financial advice, FAMR.

The review aims to consider methods in which the government, industry and regulators can develop a market that offers affordable and accessible financial advice and guidance for people at all stages of their lives.

“As part of this, it is important that we do all that we can to provide clarity on the boundary between advice and more general guidance. We are currently consulting on proposed changes to our guidance on this boundary to give firms more clarity,” Bailey added.

Moreover, it was noted that with new technologies, an engagement gap has also developed as sections of the population have indirectly become isolated. Bailey discussed that while new advancements have brought significant benefits to how the pensions industry operates, there are also some dangers.

In regards to the use of big data, Bailey said that older consumers can be vulnerable to the exploitation of this information.

“An example here is using information to identify and exploit customers who are less likely to monitor the market to get the best pricing. Older people can be among these groups. We have seen it happen.”

This was one of many issues affecting older consumers of which the regulator highlighted as pressing and is looking to address.

The FCA has also confirmed its intention to publish an assessment of the major regulatory issues in the sector in regards to retirement income products, drawdown and non-workplace pensions.

Concluding, Bailey said: “But, if I can tell you one thing from experience of the last year or so, the FCA is a fascinating place to be and I think we can serve the public interest better by getting to grips with these big issues.”

Share Story: