It’s a tricky business trying to serve two masters.
Yet, this is the unenviable position pensions often find themselves in.
The problem comes about because pensions are viewed as both a tax-advantaged product wrapper and a benefit. The government offers pensions fabulous tax breaks to encourage greater participation. But that means the laws governing how they work – how much you can pay in, how much you can take out, when and how you can access the money – are set by the Treasury and overseen by the HMRC.
The other master is the Department for Work and Pensions (DWP). Because pensions are a benefit – something to rely on when employment income is no longer present – the DWP also oversees some aspects of pensions, including their interaction with employers and disclosure (information).
This dual governance confuses the regulation environment. The FCA regulates how pensions are sold and run when an individual is buying one for their own purposes. Meanwhile the Pensions Regulator (TPR) regulates how pensions operate in the workplace.
The division between these two regulators is not always clear cut. Retail pensions are generally regulated by the FCA, but some aspects such as information is regulated by TPR. This is especially true where pensions are used for automatic enrolment when those elements will be governed by TPR, for example default funds.
Sometimes though these two worlds collide, and often the result is a disjointed approach with each master demanding slightly different things, often leaving a confused consumer at the centre. Two recent examples spring to mind.
The pensions industry has been hard at work these last five months implementing the ‘stronger nudge’ regulations. At their heart is the requirement for pension providers and trustees to offer to set up an appointment with Pension Wise for customers who want to take their benefits. Both the TPR and the FCA have come up with their own set of rules, which slightly differ. In one aspect though they differ quite a bit.
Pension providers and trustees have to nudge when someone requests a transfer with the purpose of accessing their benefits. The FCA say that the scheme which is contacted by the customer will have to nudge them. In practice most times that will mean the receiving scheme, as most people only contact the scheme accepting the transfer. The TPR, however, say that a ceding scheme has to nudge (although the receiving scheme can also do that).
That works if a person is transferring from a TPR-regulated scheme to an FCA-regulated scheme. They will probably be nudged twice, but no harm is done. However, if they transfer from an FCA-regulated scheme to a TPR-regulated scheme then the nudge may fall between two stools, and the person may not be nudged at all.
Another example is illustrations. The FCA sets the illustrative basis for illustrations given to a person at point-of-sale: when they first take out a pension. But for statements issued every year once the pension is up and running, the Financial Reporting Council (FRC) (who report to DWP) set the basis for Statutory Money Purchase Illustrations.
We end up with the disastrous position that a pension saver receives two different types of calculations – one at the beginning of the contract, and one throughout the term of the contract. There can be significant differences between the two methods – for example on charges, whether tax-free cash is shown, what type of annuity is assumed and growth rates. One key difference is a different assumption for inflation. FCA assumes 2%; the FRC assumes 2.5%.
The FRC has just closed a consultation on changing the calculation basis for SMPI, and in particular the growth rate assumptions for illustrations. In the interests of keeping things simple and accessible for pension consumers, it would be good if instead the FRC and FCA work together to agree a single workable approach to all illustrations.
However, taking a longer-term view, having two regulators for different aspects of pensions does not work in practice.
Maybe now is the time to design a new and better plan. One suggestion is that TPR only regulates defined benefit schemes. After all, these are a different beast to the rest of the pension market, with their own set of challenges. This would leave the FCA regulating all aspects of defined contribution plans – whether they are set within the workplace or bought by individuals.
This would make for a cleaner simpler approach, especially for clients but also for the industry. One regulator, one set of rules, no overlap and no gaps.
This article was previously published by Money Marketing.
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