Times have moved on at the Pensions Regulator and the appointment of a young dynamic lawyer in Nausicaa Delfas looks a step in the right direction.
Now the FCA needs to work out just where to target its efforts to ensure we have a well regulated pensions system. My starting point would be to take a step back and decide what is a pension and what is not.
To my mind , a “lump sum” whether “tax-free” or taxable – is not a pension and the Regulator needs to be clear about that. It needs to set out a common purpose for pension savings as the Australians have done. We save to have a lifetime income that gives us dignity in retirement and the common purpose must focus on not just saving the pot, but converting the pot to pension. It must also be about making sure that , in the process, the saving, conversion and payment of that pension delivers value , not just for members, but for employers who sponsor saving. That is the same whether the process is through DB, DC or CDC. It means fighting fraud, measuring value and ensuring that the money coming out of pots is reasonable.
This cannot be done in isolation, the Pensions Regulator must work with the FCA in this and with 20 years service at the FCA, Nausicaa Defras is well placed to join up the work of the two regulators. That must also be a priority.
I will give an example;
Yesterday, I spent much of my time, considering the state of the DC AVC market. AVCs are trustee investments selected by members of occupational pensions to top those pensions up. The idea is that trustees can get better deals for members than they can get on their own. Sponsors generally have little to do with AVCs other than to administer the payment of contributions.
So far so good, but here tPR and the FCA are in danger of letting the ball drop between them. The firms who administer the trustee’s AVC policy are generally regulated by the FCA and in the background the PRA – they are the traditional insurers- L&G, Prudential, Aviva, Standard Life and Aegon. But the due diligence on those contracts is down to trustees, or in the case of public sector schemes – the Boards that oversee the arrangements.
AVCs are neither the responsibility of the IGCs (who look after personal pension contracts) nor TPR (who regulate trustees), both are tangentially touched by regulation – for the FCA “treating customers fairly – the consumer duty” and TPR’s “Value for DC Scheme Members” guidance and its Code of Practice 13
The vast majority of AVCs are paid by members of public sector schemes, the majority of whom use the Prudential as AVC administrators. Despite , by their own admission, a failure to provide customers with proper support, the Prudential continue to take member’s money, not because they are offering value , but because TPR’s code of practice 13 is not being properly enforced
AVCs are popular in the public sector, especially in the LGPS where AVCs can fund cash and help savers who are members avoid penal commutation factors. There is a high level of awareness of the advantages of AVCs due to their promotion by the scheme boards, the Local Government Association and other employer bodies and the Trade Unions. There are also commercial organisations such as AVC Wise who promote both AVCs and Shared Cost AVCs (which get additional tax advantages).
Whether through the LGPS, the NHS, the Fire Service, the Teacher’s Police or Civil Service Schemes , pension saving is going on at a spectacular rate. AVC Wise confirm that the average saver into LGPS AVCs pays more than £300 per month.
There is innovation at hand and the Pensions Regulator can help improve member outcomes by paying this neglected area of pension saving some immediate attention.
Specifically, it runs the Mastertrust Authorisation and oversees mastertrusts that have it within their scheme rules to receive contributions from members as AVCs. It is possible for member’s pots to be transferred to the Defined Benefit Scheme at the point when the member is taking the pension so that it can be used to fund the tax free cash sum.
Sadly, despite the investment advantages , the low cost and the improved quality of service from these mastertrusts (acting as workplace pensions) , they are not being offered to members of occupational schemes looking to make additional savings.
How TPR can change things
I gave AVCs as an example. Another example is pooled LDI policies. Right now the pooled LDI policies are getting a lot of attention because they accidentally blew up. AVCs aren’t going to blow up but they will continue to be an area of poor value for savers, used only because of the tax-breaks they offer and because of the needs of those in occupational schemes to supplement their income.
TPR need to be on the front foot on all areas of savings, including AVCs. There is a market failure developing in this area and it may not become apparent until through mal-administration or poor savings outcomes, it becomes acute. TPR need to be on top of issues such as this and they are not resourced to do so.
The answer for TPR must be to work with the FCA together , to improve the quality of provision as well as the quality of governance within the schemes. Not all schemes that use AVCs are directly regulated by TPR (the public sector schemes aren’t ), but the principles that drive its guidance apply across the board.
As with pooled LDI, AVC products are co-regulated and we will have from next year a CEO of the Pensions Regulator who is 20 years familiar with the FCA. I am hoping that not just with pooled LDI but with many other FCA authorised products that sit within occupational schemes, we will get members better protected by ensuring they are getting value for money.