Consumer Duty rules are now in force for all new products and services, as well as existing products which remain on sale or open for renewal.
These rules set higher expectations for the standard of care firms provide to consumers.
The hope would be that any new policy or change to existing policies by any government department or regulator would be viewed through this lens.
Unfortunately, it’s not clear how much the customer is at the heart of several announcements lately. The recent Mansion House accord is a case in point.
The government has agreed with many of the UK’s largest defined contribution (DC) pension providers that at least 5% of default funds will be allocated to unlisted equities by 2030.
This is a definitive statement with no caveats that a provider or investment house simply couldn’t make
It seems clear this may help the UK as a whole and encourage wider investment in UK plc. However, when we look at individual consumers, the position is much less clear.
The government said: “Reforms to DC pension schemes will increase a typical earner’s pension pot by 12% over the course of a career.” This is, of course, a definitive statement with no caveats that a provider or investment house simply couldn’t make.
It is possible investing in these assets may provide a better return for a customer, even after the higher charges they are likely to pay. However, there is undoubtedly higher risk for consumers as well.
As this will be part of a default fund, most people will be completely unaware of the greater risks being taken by part of their pension investment, as well as the lack of diversity given the private equity investments are likely to be UK-centric rather than global.
This type of development highlights the need to do more to educate members on the risks and benefits of particular decisions, especially given the vast majority will remain invested in default funds.
The system is weighted too far towards HMRC and not towards trying to make sure a more accurate amount is deducted in the first place
Value for money is another area where concerns arise. It is clear work needs to take place on value for money, however the targeting seems slightly surprising.
Most people in the industry would acknowledge that higher charges are more likely to arise within older pension schemes. Most schemes set up in the last 10 years or so have relatively low charges. There are, of course, exceptions but if the idea is to target the area of greatest potential harm, then older schemes would seem the obvious focus, as there is the greatest scope for improving value for money.
The Department for Work and Pensions acknowledges this in its response to the consultation, saying: “We agree that savers in older schemes may be at greatest risk of poor value for money”. However, it believes there are difficulties applying the framework to older schemes so has delayed that to a later phase, initially targeting workforce default arrangements.
Another example would be the amount of total tax which has been overpaid, then refunded, on flexible lump sum pension withdrawals since 2015, which now exceeds £1bn. It is understandable why HM Revenue & Customs (HMRC) prefers this system.
Gathering more tax upfront and returning overpayments at some future point is a sure-fire way of making sure enough tax is collected. But the system appears to be weighted too far towards HMRC and not towards trying to make sure a much more accurate amount is deducted in the first place.
It is clear work needs to take place on value for money, however the targeting seems slightly surprising
Most people will accept these things can’t be exact to the penny but asking lower paid workers to pay thousands more in tax than they should – with the excuse that they will get a refund at some point – frankly isn’t good enough.
Consumer Duty can hopefully be a force for good in our industry and improve the position for many customers as well as the reputation of the financial services sector.
But we can’t make exceptions. The pension funds into which people are saving are theirs for retirement. That should be the priority. Pushing people into illiquid higher risk investments (largely without their knowledge) or targeting ways to improve value for money only in modern schemes (because that is the simplest option) looks a lot like putting the customer secondary, rather than at the heart of what is being done.
Andrew Tully is an independent consultant
