I have a lot of sympathy for the regulators in the pension arena right now – there is a sentence I would not have expected to write a few years ago.
For a number of years we have seen increased pressure from a variety of directions for the Department for Work and Pensions, Financial Conduct Authority (FCA), The Pension Regulator (TPR) and, to a lesser extent HM Revenue & Customs, to take a more joined-up approach to regulation.
An outcome of that has been the publication of the joint pensions strategy by the FCA and TPR, with an objective of delivering better outcomes for savers in the form of ensuring they have an adequate income that meets their expectations in retirement.
Regulators are attempting to develop this approach in the immediate aftermath of the pensions freedoms, the most significant change to pensions we have seen in around a century.
Even with a simple pensions framework it would be challenging to develop this approach at a time where the full consequences of the freedoms are yet to be defined. Our regulators are trying to achieve this in a highly fragmented pensions arena where the many different pension variants are not distinctly defined in the eyes of the government, regulators, or the market; where the regulation of those various pensions can fall under the remit of multiple regulators; and where there is urgency to come up with solutions because of the threat of various poor outcomes for pension savers.
This lack of distinction between different parts of the pension market appears to be severely hampering regulators in designing effective solutions.
Evidence of this can be seen in the investment pathways. These requirements are likely to deliver excellent outcomes in the market for which the rules have been designed, insured workplace pensions, but they are not likely to be as effective, and in many aspects fail to work at all, in areas like the full, ‘bespoke’ self-invested personal pension (SIPP) market. A reason for the issues with the application of the investment pathways in the SIPP market is that no one has been able to come up with a functioning definition of SIPPs as a whole, or even the different types of SIPP which constitute the market. For example it is not possible to exempt SIPPs because some insured workplace pensions describe themselves as SIPPs. And it requires creativity to completely exempt full, ‘bespoke’ SIPPs because of providers operating in that market whilst also offering a streamlined non-advised option.
Evidence can also be seen in the FCA’s recent paper on the disclosure of costs and charges in workplace pensions. Unfairly this has been reported as a watering down of the FCA’s original proposals. In reality the draft rules, which would have classed any SIPP or personal pension to which an employer made a contribution for a single person as a workplace scheme, and as a result would then have required illustrations about the thousands of funds available through the SIPP/personal pension to be made available to the customer, regardless of relevance to those customers, would not have worked. The aim of the proposals was sound, but once again the complexity of the market and the lack of a clear distinction between the constituent parts, created problems.
So we have a market that is already complex and where different models are not distinctly designed. And we have a demand for further innovation in that market.
We have regulators already facing the challenge of these problems, even while remit is limited to only parts of the market. And we have a demand for greater collaboration in how the different regulators implement their solutions.
Regulation needs to reflect a market, not define what the market does. However when the market has failed to define itself, and with pressure for better co-ordinated regulation, there is a danger regulators are left with no choice but to shoe-horn rules into places where they don’t fit.
To prevent this, all parties – the government, regulators and the different parts of the pension industry – need to do a better job of defining what it is we do.
Gareth James is head of technical at AJ Bell