But what can the FCA do to effect meaningful change and address any generational imbalance, especially over pensions whose rules are mostly the remit of the Treasury, DWP and the Pensions Regulator?
What is the problem?
First, let’s recap the issues. We know most people are not saving enough for their retirement. Among the young, low earnings, insecure and changing employment patterns and high housing costs are impacting their ability to save.
Even into middle-age, the pressures of parenting and caring for elderly parents are taking precedent, leaving many to rely on short-term credit to balance the budget.
Meanwhile, we’re all living longer, and with the goalposts moving, the amount we need to save is rising; along with it, so is the risk of having to pay for care in later years.
The FCA suggests that the industry may not be meeting the needs of certain age groups and is seeking feedback on whether their regulatory framework is to blame.
The accumulation phase
In the accumulation phase, millions of workers are excluded from automatic enrolment. This includes those with one or more lower paid jobs (predominantly young people and women returning to work part-time with young children), and the self-employed (largely Generation X, aged 35-54).
We have seen how inertia has created 10m new pension savers. But over 14m employees failed to qualify for auto-enrolment and nearly half of the 5m self-employed are excluded.
When auto-enrolment rules are changed to qualify from 'pound one', the former issue will go away, but the self-employed need a different solution – one that the FCA cannot easily solve.
The industry is not short of choice for individual personal pensions and SIPPs. Under-40s can even opt for a lifetime ISA which serves an additional purpose for first-time buyers. Pension firms’ number one challenge is engaging these people to focus on the future as well as the “right now”.
Fundamentally, though, the FCA has only one lever it could pull: the suitability requirements. Auto-enrolment circumvents these regulations, but COBS requires a suitability check for all advised sales of individual pensions.
Ironically, it can be easier for someone to apply for unsecured debt such as a store card or payday loan than to set up a pension, an imbalance that the FCA should look to try and address.
What can be done in decumulation?
We await the FCA’s Investment Pathways final report which is due in July. This aims to help people make the right choice in retirement. Once again, the regulator is hamstrung by pensions rules permitting easy access, so their next best approach is to force providers to give their customers the best possible guidance to prevent poor choices. This must be done without information overkill, something the industry is often guilty of with its regulatory disclosure documents.
What’s stopping innovation?
DP19/2 suggests that HMRC’s scheme approvals process is preventing innovation. Undoubtedly, it’s a barrier for new entrants but is also a necessary step in the fight against financial crime. And with off-the-shelf white-labelled schemes available from many providers that can fit any scale of business, approval should not cause a problem for a start-up with a strong business plan.
In fact, there is no shortage of start-up FinTechs touting their new investment and pension products to millennials and Gen-Xers, but as Nutmeg – the biggest of these in the UK – has found, it’s extremely expensive to establish a new brand.
The real reason for lack of innovation lies with the industry itself. The established players have spent millions on their digital propositions and are as keen as anyone to reach the untapped areas of the market.
Often, they are held back by compliance teams fearful of being rapped on the knuckles again, and overly cautious about being first to market with the next mis-selling scandal.
The FCA has proved it can engage in a different way via its Sandbox project. Further proactive and positive engagement with firms, and dare I say it, more help with navigating the regulatory grey areas, would help to change the compliance culture and should speed up development of new ideas.
A post-script on intergenerational transfer
Not really covered by the FCA paper but relevant to the industry is the issue of transfer down the generations. There’s desire from clients and their advisers to make this happen.
The biggest obstacle is the not the regulatory conduct framework, but the short-termism and the political and economic imperatives of the Treasury. It’s hard to plan for a tax-efficient transfer of assets if the next government is expected to change the rules at a moment’s notice. There’s nothing the FCA, or any of us, can do about that.
Article first published in Mallowstreet on 12th July 2019