This is a statement made by Pension Oldie in a rather more forceful fashion than the title might suppose. The most recent retirement income review was by the FCA last year but this blog takes on Government’s wider review of its regulation of retirement income – issued yesterday
Rather disappointing!
The review does not appear to address the most fundamental issue concerning retirement income provision in the UK. There are three different regulators involved each with their own regulatory objectives.
The Pensions Regulator – originally established purely to protect the Pension Protection Fund which covers DB pension schemes only, but which had its brief extended into DC arrangements provided within a Trust.
Further the mission creep has been extended into seeking to regulate trustee behaviour in a way that sits uneasily with the principles of Equity and the fiduciary role of Trustees (consider the powers given to it under s58 which TPR promises not to use except in the most exceptional circumstances).
This has led to a breed of trustees who believe they are being professional purely by following TPR guidance at the expense of using varied skills, background and experience to challenge advisors and indeed the Regulator’s Guidance, if they believe that would be in the best interests of their Members – (for example should following the fast track approach in the DB funding code not require an opt-in justification for the specific scheme by the Trustees).
The Financial Conduct Authority – set up to regulate organisations and individuals selling financial products. In the retirement income context this covers contract based products including personal pension pot accumulation products and advice on pot release to retirement income.
The focus of the FCA regulation is on the sales process and as a result the wide range of financial products to be considered (including those given a pensions label) requires the FCA to set conduct requirements that are onerous and not specifically targeted to pension arrangements.
Unfortunately in pension terms, the first port of call by companies seeking to relinquish the employer’s guarantee commitments of a DB pension promise has been to a Group Personal Pension arrangement where the FCA’s conduct requirements do not extend to the individual they are designed to protect.
Secondly the generalised nature of the advice required to be provided by FCA regulated advisors leads to unfortunate conflagrations and distinctions e.g. retirement income with inheritance tax planning, guidance versus advice.
The Prudential Regulatory Authority – regulates the insurance industry in all its forms including risk based insurance and life assurance. The prime focus of the PRA is to ensure that the insurer can withstand the worst case risk scenario.
In retirement income the PRA remit includes personal and bulk purchased annuities and deferred annuities in the various forms. As a result the single catastrophic risk event at the heart of the PRA’s risk analysis is unlikely to apply to retirement income related products and therefore its approach contrasts with that of the TPR.
In 1995 an insurance company buy-out was the only exit route for a pension scheme whose sponsoring employer withdrew from or was incapable of maintaining the guarantee of its pension promise to its employees.
Consequently the 1995 Pensions Act and most subsequent pension legislation embedded the insurance product into the regulation of pensions. The hundreds of billion pound losses suffered by pension schemes following an LDI based investment approach in 2021 and subsequently are primarily due to “regulatory arbitrage” between the TPR and the PRA.
More recently, particularly in January this year, the PRA has expressed its concerns over systemic risks such as those associated with funded reinsurance and the erosion of credit risk premiums and challenged insurance companies to ensure that their pricing models reflect those risks and not just priced against competitors or to secure business growth.
The challenge to the solvency valuation assumptions adopted by the Pensions Regulator as its base low risk model that this represents do not appear to have been appreciated.
Against this background, it is no wonder that each of the Regulators operating in its own silo find it difficult to understand innovative ideas and agree an appropriate controls that cross the regulatory boundaries.