I’m willing to bet that if you asked consumers what organisation protects their pension savings, a significant proportion would mention the Pension Protection Fund.
Far fewer, probably, would identify the Financial Services Compensation Scheme.
And, of course, the Pension Protection Fund does indeed protect the members of defined benefit pension schemes. What’s more it has been in the news recently because of some high profile company failures which have triggered that protection.
But FSCS also protects retirement savings. In fact, we probably protect more people than the Pension Protection Fund.
So, for example, we protect personal pensions. If someone is building a pension pot under a life insurance contract – and typically most personal pensions would take this form – FSCS would protect 100% of the value of the pot without limit in the event of the failure of the providing firm.
When it comes to investing a pension pot to generate an income in retirement, we provide the same protection for annuities – also long-terms insurance policies: 100% without limit.
If instead a pot is drawn down and placed into a range of regulated investments, those investments would be protected by FSCS up to £50 000 now – rising to £85 000 from April 2019. Our protection against bad investment or pensions advice is exactly the same.
As automatic enrolment goes from strength to strength, the number of people protected by FSCS will also grow. And the importance of that protection will also increase as pension freedom empowers consumers to make choices about generating an income in retirement.
But how well known is FSCS protection? And what impact does that knowledge – or lack of it - have on people’s decisions about retirement saving?
These are the exam questions we have attempted to answer by commissioning a number of important research studies. We presented these studies at a breakfast seminar last Wednesday.
We were joined by Parliamentarians, industry representatives and other members of the regulatory family.
The research provides some fascinating and suggestive insights.
For a start, FSCS protection of retirement saving is poorly understood.
Work by Populus shows that only around half of people realise we protect pensions at all. The figure for investments is even lower at around a third.
And fewer people still understand the scope and scale of our protection. Only about one person in twenty knows that we protect 100% of the value of life policies and annuities without limit. There’s the same level of understanding (or lack of it) of our protection for investments and investment advice.
People would, I’m afraid, be only a little bit wiser if they went to a provider or intermediary firm in search of information.
Our mystery shopping – undertaken by Ipsos Mori – found that in 60% of cases the shopper had to prompt the firm for information about FSCS protection. Only 10% of shoppers came away with a good understanding of what we protect.
Does this matter?
It is at least arguable that people only really need our protection when a firm fails – an unlikely eventuality - and that’s the point when we should raise awareness, not before.
Well, our research clearly suggests that awareness – or lack of it – does affect consumers’ behaviour – and not to their benefit.
Fascinatingly, the Populus research found that just under 30% of people would contribute more to their pension – around £1 500 a year on average – if they knew that their pension was protected. So it’s at least a reasonable hypothesis that better information about FSCS would help to promote higher levels of retirement saving.
What’s more separate research by Oxera shows that consumers who understand FSCS protection make different choices of financial product than those who don’t. People briefed on what FSCS protects are more likely to seek independent financial advice. They also more likely to invest their retirement savings in products which have FSCS protection – like annuities – rather than products outside our protection.
All this amounts, in my view, to a strong case for FSCS working in partnership with the industry to raise awareness of our protection of retirement savings.
It’s very much in the interest of firms themselves to do so because, with that added assurance, consumers may increase their retirement saving. Consumers may also be more inclined to seek independent advice.
And it’s certainly in the interest of consumers who may make better informed investment choices. Please note: I am certainly not advocating that consumers should invest in some products and not others, but simply that consumers should be able to take account of FSCS protection as one factor in their decisions, giving what weight to protection they judge right for their own circumstances
I also recognise, of course, our protection for retirement savings is a lot more complicated to explain than that for bank deposits – we protect different products at different levels for a start.
But that’s exactly why we need to work with the industry to ensure that consumers receive good explanations when they investigate and buy financial products.
Raising awareness of our protection in partnership with the industry will be a key strand of our strategy for the 2020s.