Personal pension providers are to be required to send inflation warnings to customers holding large amounts of cash in their funds, under new proposals unveiled by the regulator.
In a move aimed at the fast-growing personal pensions market, the Financial Conduct Authority (FCA) is forcing providers to do more to help unadvised customers make better investment decisions.
About 125,000 people who do not have the help of an adviser are opening non-workplace pensions every year. These schemes mainly comprise personal pensions and self invested personal pensions.
They are often used by self-employed people without access to a workplace pension, as well as by consumers wanting to supplement their workplace pension savings or consolidate existing pension pots.
But the FCA said individuals opening non-workplace pensions (NWPs), without the help of an adviser, were finding it difficult to “identify appropriate investments, or leaving large amounts of their pension pot in cash”.
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Under its proposals, published on Thursday, providers of both individual and self-invested personal pensions will be obliged to send warnings to consumers who have more than 25 per cent of their personal pension assets invested in cash for more than six months.
“Our proposals for cash warnings are to warn consumers invested in cash that their pension savings are at risk of being eroded by inflation. We want to prompt these consumers to consider investing in growth assets, since the cumulative effect of being invested in cash can mean a much smaller pension pot at retirement,” the FCA said in its consultation on the proposals.
Companies will also be required to offer ready-made, standardised investment solutions to customers opening a personal pension account.
“As the market for non-workplace pensions has developed, the range of investments available for inclusion in an NWP has become increasingly wide,” the FCA said.
“Non-advised consumers buying an NWP often have little investment expertise and may not find it easy to engage with the choice and complexity of investments.”
The proposed changes bring personal pensions closer to the regulations applied to workplace plans, where savers are currently defaulted into a ready-made investment strategy with controls on fees and strict oversight by independent governors.
However, the FCA decided against extending the same fee and governance protections to non-workplace pensions.
Mick McAteer, a former FCA board member, wrote in a tweet: “Why [the] different treatment of people saving through workplace . . . and those who don’t save through workplace? Why do they deserve less protection?”
The FCA’s intervention comes as the share of non-advised sales in the non-workplace pensions market has increased from an average of 8 per cent between 1988 and 2012 to 35 per cent in 2019. For self-invested personal pensions, which offer a very wide range of funds and are sold to the mass market, as many as 50 per cent of new sales were non-advised, the FCA said.
Becky O’Connor, head of pensions and savings at Interactive Investor, a DIY investment platform, said: “It’s really important that investors who want to do it themselves feel free to do so, while those that need a helping hand can access this, too.”
She added that Sipp investors with Interactive Investor did not generally “hoard cash”.
The FCA plans to respond to its consultation in February next year.