Churning, trail commission and complex charging structures are hitting pension pots according to Consumer Focus, the government’s consumer watchdog.
The body has written to the Financial Services Authority asking that further action be taken to tackle consumer detriment in this market, and to the pensions minister asking that Government review their policy of ’no transfers’ into Nest.
But the report, which quotes existing research carried out between 2008 and 2010 and 31 examples of client correspondence from two IFA networks, has been criticised by the ABI as being ’behind the pace’.
The report, which focuses on the individual market, concluded some consumers are being advised to switch to different pension products, often with higher charges or higher risk; the case studies in the report suggest that much of this ’churn’ is not appropriate and could leave consumers worse off in retirement.
It also says the trend for products to charge on-going fees, known as ’trail commission’, is increasing in advance of the expected ban on trail commission arising from the FSA’s Retail Distribution Review. It adds that disclosure of costs and charges remains complex and opaque, making it virtually impossible for consumers to shop around or know what represents good value for money.
Christine Farnish, chair of Consumer Focus, says: “The complexity of costs and charges, despite years of work by regulators on disclosure, make it all too easy for savings that should be going into a pension pot to be siphoned off in costs and charges. This complexity makes it impossible for consumers to judge price, and shop around for a good deal as they would in other markets.
’Too many consumers are being persuaded to switch their pension into different pension products which may well leave them worse off. Others are signing up to paying trail commission to their advisor for the life of the product which may be decades without receiving any tangible benefit.
’The FSA needs to get a grip on this market and tackle consumer detriment as soon as possible. We also call on the Government to review its policy on transfer of small pension pots into the new low cost Nest scheme when it launches next year.”
Maggie Craig, director of life and savings, ABI says: “Consumer Focus are a little behind the pace with this report. As with switching your energy supplier, sometimes shopping around can make sure you get a better deal for your savings. The Retail Distribution Review will help consumers compare the cost of financial advice and financial products.
The ABI has strongly supported the RDR from the start, and we want it to be implemented on time precisely because it will help customers know exactly what they are paying for when they buy financial products.
“The industry has done a lot of work to make sure customers understand the way that charges work, which includes showing the compound effect on a pension pot. It is important that Nest is able to keep its focus on those low income people who have not had the chance to start a pension as the reforms intended. Allowing transfers also risks undermining existing good quality provision. The important issue in pension reform right now is to work to get auto enrolment up and running rather than revisiting issues that have been long agreed.”