The watchdog has written to the Financial Services Authority asking that further action be taken to tackle consumer detriment in this market, and to the Pensions Minister asking that Government review their policy of ‘no transfers’ into the new low cost savings scheme NEST.
Millions of people hold Individual Personal Pensions which aim to provide a tax efficient and portable means of saving for retirement to people without easy access to employer arranged pensions.
The investigation carried out by Consumer Focus has identified three features of the individual personal pensions market which continue to cause detriment to consumers:
- Some consumers are being advised to switch to different pension products, often with higher charges or higher risk; the case studies in the report suggest that much of this ‘churn’ is not appropriate and could leave consumers worse off in retirement;
- The trend for products to charge on-going fees, known as ‘trail commission’, is increasing in advance of the expected ban on trail commission arising from the FSA’s Retail Distribution Review; most consumers get little or no benefit from trail commission yet the ongoing charges reduce the size of their pension pot;
- Disclosure of costs and charges remains complex and opaque, making it virtually impossible for consumers to shop around or know what represents good value for money; the compound effect of costs and charges over time is probably the most important factor determining the size of a consumer’s pension pot on retirement.
Christine Farnish, Chair of Consumer Focus, said:
"With people living longer and the state welfare system under pressure, it is vital that consumers can save for their old age in confidence, knowing that their savings are being used to grow their pension pot. Our investigation shows that practice in the Individual Personal Pensions market still leaves much to be desired.
"The complexity of costs and charges, despite years of work by regulators on disclosure, make it all too easy for savings that should be going into a pension pot to be siphoned off in costs and charges. This complexity makes it impossible for consumers to judge price, and shop around for a good deal as they would in other markets.
"Too many consumers are being persuaded to switch their pension into different pension products which may well leave them worse off. Others are signing up to paying trail commission to their advisor for the life of the product – which may be decades – without receiving any tangible benefit.
"The FSA needs to get a grip on this market and tackle consumer detriment as soon as possible. We also call on the Government to review its policy on transfer of small pension pots into the new low cost NEST scheme when it launches next year."
What should be done?
Consumer Focus is calling for a number of measures to improve individual personal pensions for consumers:
- The FSA should make insurance companies open their books so they can properly review the current use of trail commission and take action to stop it where consumers receive no tangible benefit. This needs to be done quickly as it appears that trail commission is increasing in advance of the expected Retail Distribution Review ban.
- The FSA should carry out a market wide investigation of the churning of personal pensions by IFAs in order to identify mis-selling and take action to stop it.
- The FSA, and the new Financial Conduct Authority (FCA), should strengthen measures on price disclosure for personal pensions so terms are clear and understandable for consumers ensuring products can be properly compared.
- The Government should review their policy on transfers of small pension pots into the low cost National Employment Savings Trust when it is introduced in 2012.
Allowing basic rate tax payers with small pots to transfer into NEST would help around 2 million modest savers to build up bigger retirement savings, and prevent unfairness from developing between new savers and people who bought private pensions before NEST was available.
