The biggest impact on the pension advice market this year has been the Financial Conduct Authority publishing the results of its thematic review of retirement income advice in March and changing advice standards.
It is safe to say the defined contribution (DC) pension market is healthy and buoyant, with no shortage of options to select from.
Indeed, the retail marketplace Cobs requires advisers to consider currently consists of:
| Pension type | Number |
| Individual stakeholder pension | 4 |
| Workplace pension | 57 |
| Personal pension | 134 |
Source: Defaqto June 2024
Individual stakeholder pension
This market has remained static for quite some time now. There are only four schemes available provided by Aviva, Forester Life, Royal London and Standard Life.
They are quite restricted propositions, with the smallest fund range being two and the largest only 45. Cost wise, they remain competitive with the wider market.
Except for one provider, the only way to access benefits is via uncrystalised funds pension lump sums (Ufpls). This means many savers are forced to transfer to another style of pension to take their benefits in the style they wish.
On reflection, one must question whether the FCA’s bias towards stakeholder pensions is still valid, as better consumer outcomes can be found elsewhere.
Workplace pensions
The 57 schemes currently open to new business (from more than one employer or industry) come in many different formats:
- 39% use contract governance and are regulated by the FCA. They are primarily group stakeholder and personal pensions.
- 61% use trust governance and are regulated by The Pensions Regulator (TPR). They are either own trust or master trust arrangements.
From an advice perspective, schemes that hold a Defaqto 5 Star rating are designed to help avoid introducing indirect discrimination (an offence under the Equality Act 2010) into a workplace. This is because they:
- Provide some form of tax relief on contributions to all savers
- Require no minimum contribution
- Are open to savers between the ages of 16 and 74
- Provide access to both ethical and Sharia fund options
- Provide support and facilitate options when taking benefits.
One of the main attractions of workplace pensions is that their annual fee is capped at 0.75%. According to TPR, the average paid is 0.48%. This makes them very competitive, especially in fair value assessments.
When it comes to investment options, they sit somewhere between stakeholder and Sipps by offering a range of internal and external funds. While trust-based schemes tend to offer less than 100 funds, some of their contract-based cousins can count their fund options in thousands.
Default fund performance, net of fees, has generally been quite strong. Aon and Nest both consistently outperformed their peers over the last eight years and received Defaqto 5 Diamond ratings.
Personal pensions
Historically, this type of pension has fallen into two groups: personal pensions (PPs) and Sipps.
Selecting between the two often comes down to the underlying assets being within an advice firms’ centralised investment or retirement proposition.
Today, the demarcation lines have become blurred. So much so that providers are far from consistent in how they apply the PP and Sipp labels to their pensions. Looking at the 134 PPs on our database, 10% use the description PP in their name, 61% use Sipp and 29% something else.
Due to adviser demand, we still separate PPs and Sipps based on the availability of fund options and different fee structures. The result is that 31 schemes appear on both data sets. The simplest versions feature on our PP table, while the more complex versions sit on our Sipp table.
To give you a flavour of the types of investment offered by Sipps – of the 115 individuals schemes we report on, 78 facilitate investments in a DFM, 18% provide a panel to select from, 37% allow any DFM (subject to their due diligence checks) and 45% facilitate both.
One common misconception is that Sipps are primarily used for investment in commercial property. However, only 27% of Sipps allow investment in actual bricks and mortar. Interestingly, prior to Consumer Duty, the number was closer to 40%.
From an advice perspective, it is important that like-for-like comparisons are made. Also, that the version of pension recommended is the same version that appears in the illustrations and suitability report.
Things to look out for
There are four market shifts advisers should be aware of when chatting with clients:
- Introduction of illiquid and private equity holdings
The Mansion House Compact commits signatory schemes to allocating at least 5% of their default funds to unlisted equities by 2030.
For many default funds, this increases their risk profile. Advisers are perfectly placed to monitor these changes and make sure clients remain invested in line with their attitude to risk.
- Value-for-money assessments:
In essence, a Consumer Duty fair value assessment plus a review of the fund’s governance, ESG and performance. Mentioned in the King’s Speech, we can expect more details on this shortly.
- Collective defined contribution (CDC)
A new style of pension introduced in the Pension Scheme Act 2021. It sits somewhere between a defined benefit (DB) and a DC scheme. To date, Royal Mail is the only firm publicly progressed with CDC, but more are on the drawing board.
- Decumulation options
The King’s Speech announced plans for all schemes to facilitate decumulation.
Contract based schemes have been facilitating investment pathways for a few years now. While a few trust-based schemes already offer collective decumulation.
We are also seeing robo-advice solutions coming to market, such as Pension Potential. These work across pension types and advice firms can also adopt them for their non-target market clients.
Richard Hulbert is insight consultant at Defaqto
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