Back to the future...

Last month, I went back in time to a building I’ve known in many different guises over the years: County Hall. 

In the early years of my career at the Department for Education and Science, County Hall was the seat of London government and housed the Inner London Education Authority (ILEA).   I would never have guessed then that in future years I would be coming back to take the children to an aquarium or that the offices I visited then would have another life as hotel and conference facilities.

What took me back most recently was, indeed, a conference on retirement saving organised by Money Marketing. The question for me and other panellists was: How are pension freedoms working for investors?

This also takes me back to a past life because in my time there (up to 2010) HM Treasury was always cautious about lifting the obligation to use retirement savings to buy an annuity.  The concern then was that, given their freedom, people would risk running out of money in retirement and come to depend on taxpayer support.

Though it’s early days, we can now see, I think, that that concern was not well-founded.  People are not, for the most part, acting imprudently.  Many do seek professional advice about the investment of their retirement savings.  The great majority of regulated financial advisers give conscientious and good advice.

Nevertheless, from the vantage point of FSCS – and let’s face it, we see things that go wrong – I was able to make two or three points about how to ensure that the pension freedoms do work well.

The first was that choice is good, but it does need to be informed choice.  And among the things about which investors need to be informed is the scope of FSCS protection.  Risks arise equally if investors assume they’re protected when they’re not, or assume they’re unprotected when they are.  The first leads to over-confidence and imprudent risk-taking; the second to the needless avoidance of products which may have a useful role to play in planning for retirement.

Two examples make this point. It is very important that consumers understand that FSCS does not protect them against ordinary investment risk knowingly taken on.  But, equally, there is a risk that investors will be deterred from seeking independent financial advice if unaware that FSCS will protect them against mis-selling in the event that a regulated advisor fails.

Interestingly, some research we shall publish shortly shows that people’s investment choices do vary when they’re briefed on FSCS protection.

My second point was that choice does, inevitably, carry risk and even in a well-regulated market people will occasionally be mis-advised to make imprudent investments.  That is why FSCS protection needs to be there.

This is well illustrated by the steady growth FSCS has seen in what we call SIPP-related claims.  These are claims arising from bad advice to move retirement savings from occupational pension schemes into SIPPs in order to invest in very risky and illiquid assets which promise much and deliver little.  Property in Cape Verde was the illiquid asset of choice a year or two ago; now it’s storage pods and tropical forestry.

I should say that these claims generally pre-date pension freedom.

We expect around 30% of all non-deposit and non-insurance claims to FSCS this year to be SIPP-related.  These claims will result in compensation costs this year of around £130 million.

And that brought me to my third point: these are costs that will be met by FSCS’ levy payers and must therefore, be pooled fairly across the industry.  FCA is currently consulting on the best way of doing this in future.

Meanwhile, we published on 4 January our latest edition of Outlook updating stakeholders on the prospects for our levies in the remainder of 2017/18. 

We confirm in Outlook that the continuing rise in SIPP-related claims means that we shall need to raise a supplementary levy of £24 million this year.  Because the annual levy we raised on life and pensions advisers last April was already at the £100 million annual limit, that supplementary levy will fall on the rest of the industry through the retail pool.

This is not, I acknowledge, especially palatable news, but it is the price we pay for greater choice.  Choice gives welcome flexibility to invest retirement savings in ways which reflect consumers’ risk appetite and preferred life style.  Those choices are mostly exercised prudently.  But we do need to protect consumers, who cannot readily replace their retirement savings, against occasional examples of bad professional advice.