As the US clamps down on pension providers for ripping off customers, Stephanie Baxter asks whether the UK should take heed ahead of the April freedoms
At a glance
- The US crackdown is an example of poorly informed customers being ripped off by well-informed financial firms.
- Despite extra protections in the UK, pension scams will continue to evolve alongside measures designed to combat them.
- The UK could face a different to the US as people could make poor choices as they are deterred from taking advice due to the high price.
As the UK deals with concerns about how the pension freedoms will work from April, there is a lot we can learn from the mistakes of foreign markets.
The US government has launched a crackdown on its pensions market after finding that citizens lost $17bn (£11bn) because of irresponsible advice resulting from conflicts of interest.
President Barack Obama has now ordered officials to issue rules to stop firms putting their own interests above customers by imposing a fiduciary standard on advisers and brokers.
It is an example of poorly informed customers being ripped off by well-informed financial firms. Should the UK take heed of the US example as we enter a world where people can freely access their defined contribution (DC) pots from the age of 55?
Trades Union Congress head of campaigns Nigel Stanley, who is against the end of compulsory annuitisation, believes it should concern us. He says: "The US experience should be a warning of what the UK can expect from the freedom and choice agenda. If you incentivise companies to rip people off in a market that everyone knows does not work in the consumer interest, you are asking for trouble."
The main issue with the US market is that firms were incentivised to sell people bad retirement products because they earned backdoor payments and hidden fees. As commissions have been banned in our market under the Retail Distribution Review (RDR), the UK may not experience the same issues with mainstream advice.
A robust charges and governance framework is also about to go live in the accumulation stage, which should protect savers from the high costs and low returns experienced in the US. A similar framework for retirement products such as drawdown could be on the cards in the future, although that is likely a few years away.
Despite the extra protections over this side of the pond, Pinsent Masons pensions team partner Tom Barton points out that pension scams continue to evolve alongside measures designed to combat them. Worryingly, in some cases advisers have actually been involved in scams.
He says: "Freedom and choice gives scammers a new opportunity, since they can market themselves as offering the new breed of ‘easy access' solutions. Future changes such as automatic transfer could potentially put savers at risk of further shady practices."
Other scams that could occur include firms trying to pass themselves off as legitimate advisers or offering pension assessments. Although The Pensions Regulator and Financial Conduct Authority are putting a lot of effort into stopping scammers in their tracks, it is inevitable there will be bad apples that will try.
National Association of Pension Funds DC pensions policy lead Richard Wilson warns: "If it sounds too good to be true then it probably is too good to be true. We want people to be really careful when being cold called about investment as losing all lifetime savings is a real concern."
Come April, the government's Pension wise advice service will help protect savers from making imprudent choices. There is a limit to what it can achieve given it is voluntary and only accessible at retirement, however.
The UK could face a different problem to the US: rather than being ripped off by bad advisers, people could make poor choices because they are deterred from taking advice by the price. With no commission and hidden fees, the upfront cost for retirement advice can typically be £1,500 which is unattractive to people on moderate to low incomes with medium-sized pots, says Wilson.
Savers will not get much help from mainstream pension or retirement providers because rules around advice prevent them from saying too much.
Barton believes there is an important role for independent advice and that it should not be feared simply because of some bad experience in the US. He says: "If anything, we should be working to facilitate easier access to good quality advice, perhaps as a workplace benefit. This would help steer vulnerable savers away from the bad apples."
Others such as Stanley and Wilson are calling for well-governed default pathways in decumulation to act as safety net and make it harder for people to be ripped off.
Independent pensions expert Ros Altmann has a more positive attitude. She believes the UK will actually be better off without compulsory annuitisation which has ripped off "millions of people".
She adds: "There is always risk in pensions and the best strategy is to offer financial education and information to people, help them access advice at reasonable cost and trust them then to do the best for themselves."
Obama’s crackdown on US pension advisers
• A White House Council of Economic Advisers report found some businesses had an incentive to persuade customers to buy bad retirement products because they earned backdoor payments and hidden fees.
• President Obama wants to force brokers and advisers to abide by a “fiduciary” standard, meaning they must act solely in their clients’ best interests. His proposals will go to public comment in the coming months.
• The standard was first proposed in 2010 but abandoned following backlash from brokers and the Republican party.
• It is similar to the UK’s RDR rules introduced in 2012 banning advisers from collecting commission payments when recommending pensions and investment products.
Pension Insurance Corporation (PIC) has agreed to a 30 year debt investment in Phoenix Community Housing, a not-for-profit, resident-led housing association in London.
Royal London has announced plans to allow customers with guaranteed annuity rates (GARs) to convert their guarantees into a top-up for their pension pot, subject to High Court approval.
The Salvus Master Trust will welcome another 1,200 members and 20 employers as it absorbs the £7m Complete Master Trust.
Aon has appointed Emma Adair to lead client service for its UK investment team.