The Financial Services Compensation Scheme (FSCS) provides compensation when certain financial products fail or default. Some pensions are protected by the FSCS, including annuities and drawdown schemes. The Financial Conduct Authority (FCA) oversees the FSCS. The FCA’s October board minutes confirm its continued support of the scheme but highlight concerns regarding FSCS funding, messaging and consumer understanding of protection when pension products fail.
It is possible to invest all (or part) of a pension in an annuity product, a life insurance policy which guarantees a fixed (can be linked to inflation) taxable income for either a set number of years, or for life. Another option is to invest in a ‘drawdown product’; the pension is invested in funds which are managed to produce an income for retirement – the income will depend on the fund’s performance and is not guaranteed for life. Drawdown products are higher risk and therefore less expensive than annuities. With flexibility to change pension arrangements, increasing numbers are moving to personal drawdown pensions rather than annuities; not all understand that in the event of pension products failing, the FSCS offers 100% uncapped compensation for failed annuities whereas compensation for drawdown products’ is capped at £50,000.
The FCA is considering increasing the cap for drawdown products, moving towards harmonising compensation which could simplify understanding of compensation implications when changing pension arrangements.
Consumer messaging regarding pension products is something the FCA values; the difference between products (and related costs) which guarantee income and those which do not should be more effectively conveyed to consumers. Another aspect of pension related messaging which the FCA aims to improve is ensuring consumers understand changes can occur during a product’s lifespan which modify its position and value.
Finally, methods by which to increase FSCS funding were explored, including a focus on professional indemnity insurance and increasing contributions from advisers’ bills. The FCA reasoned the latter may also ‘incentivise providers to create products which are better understood and benefit consumers more’.