But the last week of July must be some sort of record for within the space of five days we had three - and arguably four - publications from the FCA all of some significance to those with an interest in the pensions market. They were:
PS 19/12 - The final rules and guidance on the Retirement Outcomes Review;
CP 19/25 - A consultation paper on Pension transfer advice with proposed changes;
FS 19/5 - A feedback statement on effective competition in non-workplace pensions.
The fourth paper is optional only in the sense that its reach goes far beyond the world of pensions.
PS 19/20 - Optimising the Senior Managers & Certification Regime.
All of these papers are important but I want to focus on the feedback statement FS 19/5 as I believe it could have a big impact on the future of the SIPP market.
The paper has an enormous amount of data on the non-workplace pensions (NWP) market. This is defined to include Individual Personal Pensions (IPPs), Stakeholder Pensions, SIPPs as well as FSAVCs, Section 32s and Retirement annuities. It puts a value on this market of £470bn making it second only to DB schemes -£1500bn - in terms of size of assets. Over half of the assets are in IPPs.
SIPPs are divided between streamlined SIPPs – defined to be a SIPP which limits investments to collectives and equities with a limited range of platforms or counterparties - and complex SIPPs which allow a broad range of investments with a broad range of platforms/counterparties. Total SIPP assets are estimated as £150bn split 55/45 between streamlined and complex. The data covered 47 providers of streamlined SIPPs and 57 providers of complex SIPPs and estimated that there were 700,000 streamlined SIPP accounts and 300,000 complex SIPPs.
Mysteriously these SIPP figures are well below the figures that I and others have compiled for the SIPP industry over many years. Indeed the SIPP market size according to my estimates is over £300bn covering around 2 million investors. This may simply come back to a matter of definition but it certainly raises some doubts in my mind about the reliability of some of the conclusions.
I have other concerns about some of the conclusions reached in this report.
The conflation of the two main product types – viz. IPPs and SIPPs.
As is acknowledged in the paper the development path of the IPP market and the SIPP market have been very different. This is reflected in very different average fund values for an IPP customer - £27,000 – the streamlined SIPP customer - £118,000 and the complex SIPP customer - £223,000. This is clearly material in assessing, for example, the impact of charges and yet this does not seem to be acknowledged in the conclusions where all types of NWP are treated as a homogeneous group.
The research data
The research carried out on behalf of the FCA was conducted on a qualitative basis using just 73 respondents split across 7 discussion groups and 37 in depth interviews. That seems a remarkably small sample on which to base some very far reaching conclusions. Just over half the respondents had sought professional advice when taking out their NWP but there is a comment that “in several cases …. respondents had taken transactional advice with no ongoing adviser relationship”. There are no real clues as to the respondents’ exposure to the different types of NWP other than a comment that it “included traditional insurance brands and online SIPP providers. A mix of SIPPs, insurer personal pensions and FSAVCs were held across the sample”.
Given that the lack of consumer engagement is one of the key conclusions it seems very strange that more research and analysis was not undertaken to segment the different views and behaviour drivers of those customers with SIPPs as opposed to IPPs and those who have used the services of an adviser as opposed to execution only customers and orphaned clients.
Switching as a panacea for a competitive market place
The research looked at switching levels and found they were very low. Again there is no product segmentation. The conclusion drawn is that low engagement, complex charges and a lack of awareness of charges prevent consumers from identifying more competitive products. There is no reference to other aspects of the customer experience nor to the merits in consulting an adviser when considering switching. Some years ago I came up with the slogan “A SIPP is for Life” and I still believe that with the right product that is the case.
The focus on the accumulation phase
The research undertaken in connection with this paper focussed on two age bands – millennials aged under 35 and Generation X aged 36-53. This was deliberate as the focus of the paper was on the accumulation phase. However I would contend that this separation between the accumulation and decumulation phases is increasingly artificial given changing work patterns and lifestyles and could distort the results.
The role of advice
There are some strange comments about the role of advice – for example “Most relied on their advisers to make all decisions including product, provider and investment selection – with little validation of the adviser’s recommendation.” There is also a comment that reliance on regulated advice has decreased over time. Apparently in the period 1988-2012 92% of NWPs were advised at the point of sale. Since then the figure has dropped to 72%. Surprisingly only 50% of streamlined SIPPs were sold with advice – no figures are provided for complex SIPPs. It is suggested that the reasons for this reduction in the use of advice may be the advances in technology and the use of platforms, the do it yourself nature of SIPPs (I am unclear of the evidence for this) and the impact of the RDR.
The complexity of charges
Several of the conclusions in the paper are linked to the impact of charges such as charges are highly complex, older products and smaller pots attract higher charges and consumers can pay materially different charges for broadly comparable products. Most of these conclusions seem pretty obvious – for example it is no surprise that “among SIPPs, we also see that streamlined SIPPs have on average a smaller number of mandatory product charges”. The FCA want to reduce the complexity of charges to make it easier for consumers to compare products. That is a laudable objective but a lot of the complexity is the result of the complex legislative and regulatory regime that governs NWPs particularly SIPPs.
The holding of cash
The FCA return to the issue of cash only being held as an active decision – an issue that was addressed in the decumulation market and they are suggesting that similar rules might apply in the accumulation market.
Just as for the decumulation market the FCA are suggesting that that there should be a requirement on all NWP providers to offer one or more investment pathways with lifestyling. Linked to this proposal is a suggestion that a charge cap could be introduced and/or Independent Governance Committees could be a future requirement.
These are just a few of the points that struck me on a quick read of FS19/5. There is a lot more content and some sensible and well researched suggestions as to how the NWP market can be improved so it works well for consumers. I urge anyone with an interest in this market to read the paper and the associated annexes and research –and to feedback before the deadline of Tuesday 8th October.
My major concern is that in continuing to treat SIPPs – both streamlined and complex – as a packaged product in the same way as IPPs the regulator is pursuing an objective to “neutralise” SIPPs.
The paper states that 89% of IPP accounts are closed to new business and acknowledges that IPPS are becoming less popular and SIPPs more so. If that is the case surely it would be better to undertake a separate review of all aspects of the SIPP market with the aim of providing a regulatory framework that works better for all participants and really does improve customer outcomes.
John Moret is principal of MoretoSIPPs consultancy and one of the UK's most experienced SIPPs experts, commentators and speakers. He has worked for Suffolk Life and several other SIPPs providers.