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Watchdog raises concerns over personal pensions

A report published yesterday by Consumer Focus highlights serious problems in the Individual Personal Pensions (IPP) market. The watchdog has written to the Financial Services Authority (FSA) asking that further action be taken to tackle consumer detriment in this market, and to the Pensions Minister asking that Government review their policy of ‘no transfers’ into the new low cost savings scheme NEST. 

Millions of people hold Individual Personal Pensions which aim to provide a tax efficient and portable means of saving for retirement to people without easy access to employer arranged pensions. The investigation carried out by Consumer Focus has identified three features of the individual personal pensions market which continue to cause detriment to consumers:  

  • Some consumers are being advised to switch to different pension products, often with higher charges or higher risk; the case studies in the report suggest that much of this ‘churn’ is not appropriate and could leave consumers worse off in retirement;
  • The trend for products to charge on-going fees,  known as ‘trail commission’, is increasing in advance of the expected ban on trail commission arising from the FSA’s Retail Distribution Review1; most consumers get little or no benefit from trail commission yet the ongoing charges reduce the size of their pension pot;
  • Disclosure of costs and charges remains complex and opaque, making it virtually impossible for consumers to shop around or know what represents good value for money; the compound effect of costs and charges over time is probably the most important factor determining the size of a consumer’s pension pot on retirement. 

Christine Farnish, Chair of Consumer Focus, said: 

‘With people living longer and the state welfare system under pressure, it is vital that consumers can save for their old age in confidence, knowing that their savings are being used to grow their pension pot. Our investigation shows that practice in the Individual Personal Pensions market still leaves much to be desired. 

‘The complexity of costs and charges, despite years of work by regulators on disclosure, make it all too easy for savings that should be going into a pension pot to be siphoned off in costs and charges. This complexity makes it impossible for consumers to judge price, and shop around for a good deal as they would in other markets. 

‘Too many consumers are being persuaded to switch their pension into different pension products which may well leave them worse off. Others are signing up to paying trail commission to their advisor for the life of the product – which may be decades – without receiving any tangible benefit. 

‘The FSA needs to get a grip on this market and tackle consumer detriment as soon as possible. We also call on the Government to review its policy on transfer of small pension pots into the new low cost NEST scheme when it launches next year.’ 

What should be done? 

Consumer Focus is calling for a number of measures to improve individual personal pensions for consumers: 

  • The FSA should make insurance companies open their books  so they can properly review the current use of trail commission and take action to stop it where consumers receive no tangible benefit. This needs to be done quickly as it appears that trail commission is increasing in advance of the expected Retail Distribution Review ban.
  • The FSA should carry out a market wide investigation of the churning of personal pensions by IFAs in order to identify mis-selling and take action to stop it. 
  • The FSA, and the new Financial Conduct Authority (FCA), should strengthen measures on price disclosure for personal pensions so terms are clear and understandable for consumers ensuring products can be properly compared.
  • The Government should review their policy on transfers of small pension pots into the low cost National Employment Savings Trust (NEST) when it is introduced in 2012. Allowing basic rate tax payers with small pots to transfer into NEST would help around 2 million modest savers2 to build up bigger retirement savings, and prevent unfairness from developing between new savers and people who bought private pensions before NEST was available.

We want to hear from consumers

Consumer Focus is also keen to hear more from savers about their experiences of individual personal pension plans. If customers have switched individual personal pension plan over the last five years the watchdog is urging them to fill in a confidential questionnaire (You should have all your documents at hand. The survey closes on 16 September 2011). Consumer Focus will be collating consumers’ responses and giving anonymised information about people’s experiences to the FSA.  


Consumer Focus’s report: ‘Is it advisable? An investigation into switching and advice in the individual personal pensions market’ can be found at the following link and a media factsheet can be found at the following link. 

Consumer top tips 

  • Consider all of your options

The most important thing to do is to consider all of your saving options for your retirement, this means not just personal pensions or employers pensions but SIPPs (Self Invested Personal Pensions), NEST (National Employment Savings Trust) and ISAs.  Get a clear understanding of what each of these different possibilities offers you and what the costs are.  

  • Get Advice

As a part of considering your options, make sure that you get advice. You can get free, impartial advice from The Pensions Advisory Service (http://www.pensionsadvisoryservice.org.uk/, 0845 601 2923). TPAS’s website provides information on different sorts of pension and their advice line can help guide you through your options. As with getting an estimate for building work or other major purchases, shop around and consult more than one IFA to see what they advise. 

  • Read the small print! (and keep the paperwork) 

Read the small print, all of it! When you receive written advice about a pension make sure that you read it. In particular look for information about any payments that are being made to your IFA (if you have one) and what charges are being deducted from your contributions or savings. If there is something you don’t understand or want to query contact your pension company, your IFA or TPAS. It is worth specifically asking what charges and fees you will pay – both initially and then on an on-going basis. 

Pensions are complicated products so don’t feel embarrassed if there is something you’re not sure about. Don’t sign anything until you’ve understood what you’re agreeing to and how much it’s going to cost you. Finally, keep your paperwork somewhere safe for future reference. 

  • As part of its research for this report, Consumer Focus commissioned consumer surveys; undertook a review of FSA data on insurance companies and information requested from IFAs and pension providers (using Consumer Focus’s statutory powers). The first omnibus survey was conducted by TNS Omnibus in October 2010 (1,450 adults aged 18-65). The second more targeted online survey of 1,001 adults who have taken out a personal pension aged 18-65, was undertaken by YouGov in December 2010. The same questions were used in both pieces of research.   
  1. Further information on the FSA’s Retail Distribution Review is available here
  2. Source: HMRC Data Table 7.13 Personal and stakeholder pension fund values.  NEST pensions will be introduced from October 2012, offering lower set-up and management fees. This is designed to encourage lower income consumers to save more for retirement. However it is planned that it will only take new pension payments, it will not accept transfers from existing pensions.

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