Retiring unhurt

If you’ve read my previous blogs or our recently published Plan & Budget 2018/19, you won’t have missed that the main area of growth in claims to FSCS arises from retirement saving.

Claims against pension advisers have been rising for some time.  They mostly concern bad advice to move pension savings out of an occupational scheme and into a SIPP in order to hold risky and illiquid assets. 

In January we declared in default three SIPP providers themselves because of serious due diligence failures.  And we are now beginning to receive claims because of bad advice to cash in benefits accrued under DB schemes.

We shall be publishing final levies for 2018/19 in April reflecting this growth in claims.

All this leads me to conclude that, from the point of view of FSCS protection, retirement saving is different. 

Retirement savings build up over a working life with contributions from employers, the Exchequer (in the shape of tax relief) and, of course, from the savers themselves.  As a result for most people retirement savings typically dwarf other financial assets.

This means that, by the later years of working life, retirement savings are more or less irreplaceable.  If you make a mistake investing those savings, or are badly advised, you run the risk that your income in retirement will be badly depleted.

There will then be little that you can do about it.

So decisions about retirement savings carry risk, but, increasingly, they’re decisions that people are making for themselves as a result of pension freedom in 2015.

This was a reform whose time had come.  People’s circumstances and aspirations for retirement vary hugely.  Annuities are a great (and often under-estimated) product, but they are not right for everyone.

But people do need help.                

Many people struggle with big financial decisions.  Research[1] published by the Financial Conduct Authority last year showed that around a quarter of 55-64 year olds with a DC pension pot did not know how much was in it.  Only around half of this age group have given much thought to how they will manage in retirement.

So people are faced with complex, high stakes choices, but often with imperfect knowledge and information. 

And this is where FSCS comes in.  People need to know what FSCS protects and the scope of our protection.

This week we are publishing fascinating research which shows exactly what difference awareness of FSCS can make.

We asked the economic consultancy, Oxera, and the Centre for Experimental Social Sciences to run an experiment for us.

Just over 2 000 people – all aged 45+ - were given an imaginary pension pot of £80 000 and a choice of investment options ranging from cashing out the entire pension pot, to buying an annuity, to investing in property or buying shares.

Some participants were briefed on FSCS protection for retirement savings; others weren’t.

The briefing mattered.  The two groups made different choices about how to invest their pots. 

Those people who knew about FSCS were more likely to choose retirement products that have our protection.  So, compared to the control group, they were less likely to invest in property or to buy shares.

Interestingly, the group with knowledge of FSCS were also more likely to take financial advice (which we protect) than those who were unaware of FSCS.

This shows then that awareness of FSCS protection can make a difference.

But there are two issues.

One is that awareness of FSCS protection of retirement saving is low – and not just among consumers. 

We also published this week the results of mystery shopping, undertaken by Ipsos Mori, focused on firms giving advice about pensions, investments and annuities.  This found that awareness of our protection limits among advisers is disappointing.

Only 23% of those questioned were aware of the compensation limit for pensions.  34% - still less than half – knew how we protect annuities and other long-term insurance products.  The result for investments was very similar.

This underlines the importance of much more widespread knowledge of, and trust in, FSCS’ service. 

The other issue is the level of FSCS protection for retirement savings which is inconsistent.

If you buy an annuity from a UK-regulated firm, FSCS protects long-term insurance products in full.

But if you go to an investment or pension adviser and are given bad advice, our protection is currently only £50 000.  The same limit applies to investments in regulated products themselves.

FCA has recently proposed[2] an increase in these limits to £85 000.  That is very welcome.  The question is whether that provides adequate protection now that we are beginning to see claims arising from bad advice to cash in defined benefit pensions where the value of pension rights can be in the hundreds of thousands of pounds.

And that brings me back to where I started; retirement saving is different. 

These are losses which the people concerned can’t possibly afford and have no chance of making up.

FSCS protection is, therefore, hugely important.  I’m very glad FSCS is out there publishing research and shaping the debate.

[1] Understanding the financial lives of UK adults – Findings from the FCA’s Financial Lives Survey 2017.

[2] Reviewing the funding of the Financial Services Compensation Scheme (FSCS) feedback from CP16/42, final rules and new proposals for consultation.  Consultation Paper CP17/36