The pensions industry we see before us today is very different to that of just a decade ago. There have been considerable changes in regulations creating a more flexible landscape to manage your pension assets. More changes are expected in the short, medium and longer term. Therefore you must be vigilant and aware of potential issues which might harm your pension prospects.
A recent report by the Financial Conduct Authority (FCA) has cast a fascinating light on potential issues which may harm your pension assets.
1. Auto-enrolment has reduced member engagement
There is no doubt that the decision to create work-based pensions with auto-enrolment for eligible employees has been hugely successful. The membership of trust-based defined contribution pension schemes has increased from 2.4 million in 2010 to a staggering 21.8 million in 2021. It is fair to say this has created the perfect environment for individuals to begin saving for their pensions at a relatively early age. Are there any downsides?
The Financial Lives Survey 2020, conducted by the FCA, unearthed some concerning statistics:
- 38% of those who currently contribute to a work-based defined contribution pension scheme were unable to confirm either their contribution or that of their employer
- 53% admitted to not reviewing their pension pot for at least 12 months
- 31% of those who replied have no idea who administers their defined contribution pension scheme
These are worrying statistics that perfectly illustrate a lack of engagement from members of auto-enrolled defined contribution workplace pension schemes.
Auto-enrolment, the double-edged sword
While auto-enrolment has prompted a massive increase in membership numbers for workplace schemes, there is a downside. The default position means that new members, who perhaps have little interest in pension investments, are not as engaged as they could or should be. Many seem content to continue with the default position and not consider the options which may best reflect their circumstances.
2. Poorly performing investment products
Whenever pension investments are discussed, advisers tend to add the proviso that they are “long-term investments.” The suggestion is that you invest for the longer term, creating a misconception that active pension investment is not the norm. First of all, yes, pensions should be considered on a long-term basis, but this is no different to any other type of investment. Whether you retain underperforming assets or products is a whole different question!
When looking at underperforming products and investments, the two should be considered in isolation.
Underperforming pension products
When we talk about underperforming pension products, in effect, this is the pension plan and how it is structured. As we touched on above, the general level of member engagement with workplace pensions means that these products are rarely held to account. There are numerous issues to consider, such as:
- Fees associated with the arrangement
- Range of investment opportunities
- Suitability of scheme for employees
- Issue of deferred pensions when changing employer
Even though most employers may well provide a perfectly suitable workplace pension scheme for their employees, it is vital you know the details.
When looking at underperforming investments, this is probably more relevant to personal pension schemes and those self-managed to a varying extent. You must monitor the performance of your assets on an annual basis (minimum).
You should receive an annual update from your pension provider showing the value of your assets, your projected pension, and other details. Unfortunately, while some of us may take a quick glimpse at the figures, in all likelihood, the document will end up in the bin. Investment trends change regularly, so a type of fund which performed well over the last ten years may underperform as well over the next ten years. Just because your pension scheme is seen as a long-term vehicle does not mean that individual investments should be held forever and a day.
It is important to remember that your pension scheme may be invested for ten years, 20 years, 30 years or even more. In the following table, we have compared and contrasted the performance of two different investment funds, one showing a return of 1% per annum and one showing a return of 5% per annum. Each of the funds starts with a £100,000 investment, and you might be surprised at the difference in returns:
|Year||1% Return P.A.||5% Return P.A.||Difference in Return|
As you can see, the long-term impact of just 4% per annum difference in return is enormous. In this instance, the figures speak for themselves. Retaining your pension assets in underperforming funds and investments can seriously impact your wealth in the longer term.
3. Inappropriate transfer decisions
The transfer of pension fund assets is a fairly complex affair. The more complicated transfers involve switching investments from a defined benefit pension scheme, a final salary scheme, to a defined contribution scheme, a money purchase scheme.
Final salary scheme
This is a workplace pension scheme where the level of pension paid in retirement will depend upon your final salary and years of service. However, due to various changes over the years, final salary pension schemes are now few and far between. Consequently, if you are considering the transfer of defined benefit pension assets with a value of more than £30,000, the law requires that you take professional financial advice.
Money purchase scheme
With a money purchase pension scheme, there is no defined pension on retirement. The value of your pension fund will depend upon how well your investments have performed. While there are more options today, if you choose to acquire an annuity, then the income received will be based upon market rates at the time.
It is vital to be wary of third-party pension investment returns which look incredibly generous on the face of it. You may be getting enticed into non-regulated products or part of an elaborate fraud/scam. When looking to make significant changes to the management of your pension assets, you should discuss these at length with your financial adviser. In a worst-case scenario, this will prompt you to delay the transfer and perhaps give it more consideration. In a best-case scenario, it will stop you from putting your pension assets at risk!
4. Lack of confidence in the complaints procedure
When considering a complaint about the management of your pension assets, it can often feel like David versus Goliath. On the one hand, we have huge pension fund operations looking to defend their position and activities, while relatively inexperienced individuals look for answers. On the other hand, it would be unfair to suggest we have not seen improvements in pension investment regulations, but the system isn't perfect.
If you have a complaint about the management of your pension assets, the process is as follows:
- Approach your Pension Fund Administrator
- If you have no success, approach MoneyHelper
- The final port of call is the Pension Ombudsman
Many people have complained about being "passed from pillar to post" by various complaints bodies. While you may experience delays, crossed wires and passed through multiple departments, keep at it. Remember, this is your retirement pension fund you are trying to protect and ensure that everything has been and continues to be above board.
As we alluded to above, the recent regulatory changes have breathed new life into the pensions industry but also attracted fraudsters and scammers. You may well be the recipient of unsolicited third-party communication or be tempted by one of the many pension-related adverts "promising" huge returns. There are several bullet point issues to consider:-
- If it looks too good to be true, it probably is
- Use the FCA website to check that financial advisers/providers are authorised in the UK
- Always take financial advice
While there are still various levels of protection where the transfer of pension assets will at least be questioned and sometimes blocked, ultimately, it is down to the individual. These levels of protection are there to make individuals reconsider, think again and finally decide whether a transfer is really in their best interests. In this scenario, you may find that paying for financial advice is the best investment you have ever made!
Fraudsters and scammers will go to unbelievable lengths to cover up their actions and steal your funds. By the time you realise you have been scammed, it may be too late; your funds could easily have been transferred overseas and are non-recoverable. To add insult to injury, in some scenarios, you may be fined by HMRC for the unlawful withdrawal of pension funds from your plan. Be careful!
It will be no surprise to learn that pension terminology and jargon has also been a problem for many people looking to manage their pension assets. The Internet has prompted many of us to look at self-management of pension assets. In theory, you will find a whole host of information, questions and answers regarding pension funds, pension investments and the regulations covering pension drawdown. However, whether all of the information is accurate and easy to understand is a very different matter.
If you don't fully understand the pension terminology used, then how can you fully understand what is on offer and how your pension assets may be treated going forward? While it is useful to have at least a basic understanding of pensions, your financial adviser could be worth their weight in gold when advising on transactions. As we touched on above, it is also vital that you only work with authorised financial services companies.
Here at Pension Times, we have created our very own pension glossary, which covers an array of different terminology. This will give you an understanding of the terms used and precisely what they mean. It is no replacement for financial advice but may provide you with a greater understanding of exactly what is happening.
Maximising your pension prospects is the key
Even though the industry and the general public welcomed recent changes to pension regulations, this increased flexibility has come at a cost. Whether you are self-managing your assets or using third-party pension management companies, there are many issues to consider. These include a greater understanding of pensions to the impact of transfers, knowing when to switch investments and how to avoid scams.
The world of pensions can be highly complicated, and the recent change in regulations has caused some confusion. Consequently, you must take professional financial advice when considering any changes to your pension plan. As we touched on above, a relatively modest difference in annual investment performance can significantly impact returns over 10, 20 or 30 years.