Advisers’ charging models are set to come under scrutiny yet again this autumn as the Work and Pensions select committee sets out to establish whether pensions, including drawdown and advice, are providing value for money.
The Pension Costs and Transparency inquiry will begin taking evidence in the next few weeks; the committee having already examined the pension freedom reforms and looked at the vexed issue of British Steel Pension Scheme transfers earlier this year.
The terms of reference suggest that some aspects of advisers’ models could certainly come under scrutiny. The committee wants to know if individuals –
- get value for money for their pension savings
- understand what they are being charged and why
- understand the short- and long-term impact of costs on retirement outcomes
- can see how their money is being invested and how their investments are performing
- are engaged enough to use information about costs and investments to make informed choices about their pension savings
- get good-value, impartial service from financial advisers
FCA criticism of opaque charges
The initial announcement also noted the range of drawdown charges already found by the FCA’s work suggesting that this may also be an area of interest.
It said: “The FCA’s Retirement Outcomes Review highlighted a lack of competitive pressure and low customer engagement in the marketplace for drawdown products. It found that drawdown charges vary from 0.4% to 1.6% between providers (higher on average than in accumulation) and can be complex, opaque and hard to compare: products can have as many as 44 charges linked to them.”
Finally it asks several questions including the following –
- Do higher-cost providers deliver higher performance, or simply eat into clients’ savings?
- Do pension customers get value for money from financial advisers?
A history of weighing in on financial services fees
One question for advisers to ask themselves is whether this is yet another of the seemingly never-ending look at what advisers charge that may lead to small changes or a game changer.
The history of policymakers and their attitudes to charging is a long running story – some leading to fundamental changes such as the stakeholder pension price cap, the RDR commission ban and to a lesser extent the banning of consultancy charging on workplace pensions and the ending of rebates.
Other work is more slow-moving such as the work on fund management charging. Indeed, we are, arguably, still waiting to see what the value for money requirement adds up to for fund firms.
The power of the Work and Pensions committee
But is the committee likely to be influential? The answer may be that the committee is already more influential than many others in Parliament.
Political insiders would credit it with saving the FCA register in its current form, when it became clear during the sessions surrounding British Steel, that the public were at risk of losing access to this information source.
It has also suggested a ban on contingent charging and that is now being considered by the FCA though it doesn’t of course get everything it wants and that is still to be decided.
Ralph Jackson, a public affairs expert and director at Lansons Group says: “The process is the important part of this in terms of what the outcome might be, so the reason this investigation is taking place, is because this area of pensions is a fundamentally important part of what the Department for Work and Pensions does. The committee has taken a view that this area needs to be looked in more detail.
“I can only think they are not likely to be praiseworthy, therefore this investigation is to shine a light as to what the committee believes should be done. Because committee chairman Frank Field did a job in the same department, I think he will have a pretty good idea about the outcome he wants to see, so the department might be a little nervous.”
“The key to whether this sees further activity depends on what people say during the investigation process. Whoever comes in and gives evidence will shape the committee’s thinking. That will be fundamental.”
Protecting consumers
Aegon pension director Steven Cameron says: “It is quite clear a lot of what they are asking is similar to work elsewhere. We have seen this happen in other inquiries. They proposed a default decumulation strategy into a product, a fund and to decide the income to take. We knew the FCA has been carrying out extensive work including defaults for non-advised customers. The FCA’s is a lot more finessed approached with three investment pathways.
“When you look at the committee questions some are very open. The question about people getting value from advisers. This is smack in the middle of FCA territory.”
He also makes the case that the huge reforms such as the RDR were designed to put the power into the hands of clients to determine value. He also notes that the retirement outcomes review and to an extent the platform study appear to suggest the regulator is most concerned with direct consumers. The committee’s work may be slightly at odds with that. It may also need more than one question.
He adds: “The FCA has not undertaken a very specific market study or review to ask how much are advisers charging and is the value received by customers greater than the charge. The Work and Pensions committee might think that lies in their territory but that is such a complex question. If they were really seeking to explore that it would need a very comprehensive set of questions and extensive set of answers across the market. Look at DB transfers – how do you place a value on advice not to transfer? Not an easy answer to arrive at.
“The committee has a role to play but maybe it would be better to look at where government policy or the regulator is working or not rather than casting the net quite so wide.”
However Jackson adds: “I can’t believe they are not going into this without an idea of what the outcome will be. I think the FCA will look at this very closely. The regulator will want to see what this means for the people they regulate and it may mean that the people who sell pensions may have to do things slightly differently.”
