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Pension freedom policy was rushed, says FCA chair

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The UK may have rushed the implementation of its ‘pension freedoms’ policy in 2015, according to the chair of the country’s financial regulator.

In a speech this week, Charles Randell, chair of the Financial Conduct Authority (FCA), noted that the regulator and policy makers were still developing responses to the rise in fraud activity since the government relaxed at-retirement rules four years ago.

The UK government removed the requirement for people in defined contribution (DC) approaching retirement to buy an annuity in a policy decision made in 2014 and effective from 2015.

It has meant a significant increase in people withdrawing their pension savings as cash from DC schemes or transferring out of guaranteed defined benefit (DB) schemes.

Randell said: “A number of the victims of [fraud] are pension scheme members who have been persuaded to make poor decisions when exercising their new-found freedoms to transfer out of a defined benefit scheme. Exercising this freedom is unlikely to be in the interests of the majority of pension scheme members.

Charles Randell, FCA

Charles Randell, FCA

“We don’t know exactly how many people have been scammed into transferring their pension pots to fraudsters or skimmed by bad advice to switch to inappropriate high risk or poor value investments, but it’s clear that it could be a large number.”

More than 5m pension savers were at risk of falling victim of tactics used by fraudsters, Randell added.

Although Randell declined to express an opinion on the pension freedoms policy, he highlighted questions raised by MPs in the parliament’s work and pensions select committee.

The cross-party group of MPs raised concerns about the implementation of the policy during an enquiry last year into the restructuring of the British Steel Pension Scheme.

On the policy, Randell said: “It was implemented in 2015, relatively soon after it was announced in 2014, but responses to the risk of skimming and scamming are continuing to be developed.

“For example, a ban on cold calling became effective at the beginning of 2019 and the FCA proposes to ban contingent charging for pension transfer advice from next year.

“All policy makers, including the FCA, need to learn lessons for the future from this experience. One of which is that a very major change of policy like this needs a substantial period of planning and testing so that all the necessary safeguards against skimming and scamming are integrated before it is launched.”

Pensions minister Guy Opperman said last month that an fraud awareness campaign launched by the FCA and the Pensions Regulator had prevented savers from losing £34m (€38m) to financial criminals. 

Keith Richards, CEO of the Personal Finance Society, said the ban on cold calling in relation to pensions should have been in place “from the beginning”.

Richards added: “Equally, the FCA is now making commitments to police the regulatory perimeter, but in the past this area fell between many stools – the police were responsible for investigating fraud, the Treasury and Department for Work & Pensions were in charge of authorising occupational pension funds from a tax and regulatory perspective and the FCA policed conduct of regulated activity.

“Scammers managed to get enough authorisations to look respectable, without having their activities properly monitored. It took a long time for all the organisations involved to develop a co-ordinated approach.”

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  • Charles Randell, FCA

Readers' comments (2)

  • "The UK government removed the requirement for people in defined contribution (DC) approaching retirement to buy an annuity in a policy decision made in 2014 and effective from 2015."

    Why is the above still misreported in this way? The requirement to buy an annuity was fully removed in Finance Act 2011 (http://www.legislation.gov.uk/ukpga/2011/11/pdfs/ukpga_20110011_en.pdf).

    Budget 2010 (June): "1.117 The Government will end the existing rules that create an effective obligation to purchase an annuity by age 75 from April 2011 to enable individuals to make more flexible use of their pension savings. The Government will shortly launch a consultation on the detail of this change and will introduce transitional measures for those yet to secure a retirement income who will reach 75 in the meantime."

    Budget 2011: "2.52 Pensions annuitisation – The June Budget 2010 announced that the effective requirement to annuitise by age 75 would be removed from April 2011. Draft clauses were
    published on 9 December 2010 following consultation on the details of the change during summer 2010."

    I have no suggestion of how best to characterise the changes made in 2014/2015, but the characterisation you provide is incorrect.

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  • Hi Richard,
    You're right, of course, that some of these freedoms were introduced earlier. However, the 'pension freedoms' or 'freedom and choice' policy was explicitly rolled out by the government in 2014-15.
    The consultation took place in 2014: https://www.gov.uk/government/consultations/freedom-and-choice-in-pensions
    The relevant bill (which was dominated by 'defined ambition' policy) received Royal Assent in March 2015: https://www.gov.uk/government/collections/pension-schemes-bill-2014-to-2015
    - Nick Reeve

  • Hi Nick,

    Having said that I had no suggestion of how best to characterise the changes made in 2014/2015, I've done a bit of research and think that I can now suggest a reasonable way to characterise the changes.

    I stumbled across a "Budget 2014: greater choice in pensions explained" fact sheet (https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/301563/Pensions_fact_sheet_v8.pdf).

    Having read that fact sheet (and I appreciate it may not precisely reflect what was to be enacted in law), the focus seems to be on the movement to "full flexibility" when it comes to taking money from a "pension pot" from age 55.

    It is not that, prior to the changes, people were required to purchase an annuity (any requirement to do so having been fully removed in Finance Act 2011), but that there were limits placed on the amount that could be taken in capped drawdown and that there was a "penalty" tax charge of 55% if people wanted to "withdraw the whole pot".

    So, I'd suggest a reasonable way to characterise the changes made in 2014/2015 would be to say that: (i) any limits on the amount that could be withdrawn from age 55 were removed; (ii) the rate of tax payable on any money withdrawn (above and beyond the tax free amount) was reduced from the "penalty" rate of 55% to the taxpayer's marginal rate of income tax. So, nothing at all to do with annuities.

    Best wishes,

    Richard.

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