The watchdog ‘Consumer Focus’ has warned today of the many risks that still surround the Individual Personal Pension (IPP) market.
Consumer Focus has written to the Financial Services Authority (FSA) and the Pensions Minister to tell them of its concerns.
There are millions of IPP holders who use the pensions as a way of accumulating savings in a tax efficient way for their retirement, especially where they do not have access to a scheme run by an employer.
The watchdog has highlighted three main areas in its report where the consumer is at risk:
- Pension fund switching – some IPP holders are being advised to take their funds out of their current pension and place it with another provider. In many cases this ‘churn’ can end up putting the money into a new fund that has higher charges, which may leave the consumer worse off in the long run. But the adviser does earn a nice fee for doing this and 30% of IFA pension business comes from this source and not new savings.
- Trail commission – many funds will pay the initial adviser regular commissions ‘trail’, which in most cases does not benefit the pension holder at all. This practice, says Consumer Focus, is increasing as the Retail Distribution Review (RDR) expected ban on this practice gets nearer. Nearly 75% of consumers are unaware that they are effectively paying their adviser, who they may never see again, a regular fee.
- Complexity of costs and charges – with most modern funds there are many set up, get out and ongoing fees involved; all of which impact on fund performance. The watchdog says that this area of disclosure is still ‘complex and opaque’ with the adverse compounding effect of these charges not being apparent to the consumer.
Consumer Focus wants to see the following four improvements to IPPs:
- The FSA should be investigating the proper use of trail commission and stop it where the consumer gets no benefit. For example, according to the Consumer Focus fact sheet, IFAs are often required by contract to provide an ongoing service to the consumer for this fee, but 53% of policy gilders said they received no ongoing service at all.
- A market wide ‘churn’ activity should be conducted by the FSA to find, stop and punish mis-selling.
- The regulators should further tighten disclosure requirements to ensure that the consumer is fully informed of costs and their impact on future fund growth.
- Those basic rate tax payers with small pensions should be allowed to transfer their pension funds into the new low cost National Employment Savings Trust (NEST) when it is introduced in 2012.
There are of course many circumstances in which changing pension providers is a good thing for the consumer. And the vast majority of IFAs are honourable people. But until it is more transparent and some advisers are discouraged from churning other peoples’ pensions to garner commissions then some people will be disadvantaged by doing nothing because they do not know who to trust.
Let’s hope that the RDR deals with most of these issues when it comes into force at the end of 2012.