The FCA has published its Business Plan for 2015/2016. One of the key themes for both regulation and risk is the pensions market given the pension reforms taking place on 6 April. The Business Plan highlights the fact that the pensions market is a key area of concern for the FCA and an area which it will be monitoring closely in the next year and beyond.
The April reforms
The pension reforms taking place on 6 April 2015 allow members over the age of 55 of defined contribution/money purchase pension schemes to access their entire pension. Members will no longer be faced with buying an annuity and instead potentially face a plethora of decumulation products.
Risks for the pensions market
The FCA's Business Plan notes that 24% of the UK's population will be over 55 by 2035, in comparison to 17% in 2010. Those aged 85 or over accounted for 2% of the population in 2010 but are estimated to rise to 5% to 2035.
The ageing population coupled with increasing numbers joining defined contribution schemes given auto-enrolment brings with it risks for the pensions and wider financial services market, and which are noted at length in the Business Plan. These risks include:
- Consumers underestimating their longevity, inflation and investment risk of pension products.
- The pension reforms are likely to lead to the development of further decumulation products and with that there are likely to be difficulties for advisers and consumers when seeking products.
- Increasingly complex products or mixed/hybrid products may require on-going servicing costs which could eat away at a member's pension as they reach the latter years of retirement.
- It could be more difficult for consumers to find products which meet their needs.
- There is likely to be less choice for consumers with smaller pots.
- Although the Government's PensionWise service will allow members to access guidance free of charge, low consumer confidence in the advisory market and the lack of any appetite to shop around could lead to a reduction in competition (and which the FCA will now be regulating).
- Retirees with large resources may be at high risk of financial crime (and for which the FCA has introduced ScamSmart on which we reported earlier this week).
The risks highlighted add to those already identified by the FCA in respect of the annuity market and consumers failing to take up their open market option and a failure generally to save enough for retirement. The Business Plan also highlights as risks (1) the increased sale of equity release products and (2) new products catered to long term care with the introduction from April 2016 of a £72,000 cap on care for the elderly.
What is also interesting about the FCA's Business Plan is that there is little reference to consumer responsibility despite what Martin Wheatley said before the NAPF in Edinburgh about the "bumping across" of responsibility to consumers who must, themselves, take responsibility for their own decisions on retirement.
The Business Plan refers to pensions at each turn, including (1) the seven areas of focus, (2) key priority protection for consumers and (3) under the FCA's new market focus work programme where there is to be a focus on retirement sale practices and consumer outcomes on advised and non-advised sales. With that, the FCA intends to launch a review in early 2016 to look at both advised and non-advised sales once the new freedoms have bedded down.
The FCA is alive to the risks which accompany the pension reforms but also faces the difficulty of not knowing how the market is likely to develop post April. As the Business Plan states "[the FCA is] mindful of the risks that may flow from innovation in a marketplace that has yet to reach maturity in terms of the range of products and services available. We will monitor this closely over the coming year and beyond".
Although the Business Plan contains pensions, pensions and yet more pensions it is unlikely that that focus is going to change for some time to come.