The UK pension market is a mature one, but one that is alive with innovation. This creates opportunities for advice firms and consumers, but COBS still places an onus on you as an adviser to make clear why you’ve recommended one pension option ahead of the myriad of others available.

Indeed, the retail marketplace currently consists of the following pension types, listed in order of suitability as defined by the FCA in COBS 19.2.:

Pension Type	Number
Individual Stakeholder Pension	4
Workplace Pension	57
Personal Pension	134

Source: Defaqto June 2024

In essence, if you recommend a personal pension, you should record in your compliance file why you’ve not recommended those listed above it. 

So, to give you some food for thought, let’s look under the bonnet of each style of pension to see what’s going on.

Individual Stakeholder Pension

This market has remained static for quite some time, with only four schemes available from Aviva, Forester Life, Royal London, and Standard Life. 

These schemes have limited fund ranges, the smallest being 2 and the largest only 45. In addition, many Personal Pensions (PPs) provide more investment options and lower charges.

Furthermore, except for one provider, the only way to access benefits is through UFPLS. This means many savers are forced to transfer to another style of pension to access their benefits in their preferred manner. 

On reflection, one must question whether the FCA’s bias towards stakeholder pensions is still valid, as on nearly all measures better consumer outcomes can be found elsewhere. 

Workplace Pensions

There are currently 57 schemes open to new business from more than one employer or multiple industries, and are available in various styles: 

• 39% use contract governance and are regulated by the Financial Conduct Authority (FCA), primarily group stakeholder and group personal pensions.
• 61% use Trust governance and are regulated by The Pensions Regulator (TPR). They’re either Own Trust or Master Trust arrangements. 

From a consumer perspective, there is little difference between the experience or outcome.

However, schemes that are accredited with a Defaqto 5 Star Rating can help advice firms avoid inadvertently introducing indirect discrimination (an offence under the Equality Act 2010) into the business it advises. This is because they all: 

• Provide some form of tax relief on contributions to all savers (net pay cannot do this)
• Require no minimum contribution
• Have no age restrictions between 16 and 74
• Provide access to both ethical and Sharia fund options
• Provide support and options when taking benefits

 

One of the main attractions of workplace pensions is the capped annual fee at 0.75%. According to TPR the average paid is 0.48%. This makes them highly competitive compared to stakeholder and PPs, especially in fair value assessments and the hotly anticipated value for money assessments.

When it comes to investment options, they tend to 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.

All workplace schemes have a default fund. They are often multi-billion-pound portfolios  and have a wide range of underlying assets, including illiquid and private equity stocks. 

From an ESG perspective, these funds must halve their 2019 carbon emissions by 2030 and be carbon neutral by 2050, with some funds further along this path than others.

Performance, net of fees, has generally been quite strong. Aon and Nest both consistently outperformed their peers over the last 8 years and received Defaqto 5 Diamond Ratings. At the other end of the spectrum, we have funds that have consistently received 1 and 2 Diamond Ratings; unfortunately, some of these are commonly held and are from well-regarded providers.

When it comes to taking benefits, contract-based schemes must offer the required investment pathways. Trust-based schemes decumulation options vary, with some providing limited options and others offering collective decumulation that accommodates the four pathways in a single solution, making them simpler to understand and more cost effective than those available from contract-based providers.

Personal Pensions

Historically, PPs have fallen into two groups:

• PPs are a lower cost option that provide access to a limited, often in-house, fund range.
• SIPPS, often a more expensive option, provide access to a wide range of investment options, including DFMs and commercial property ownership.

 

Choosing between the two often depends on the underlying assets held within an advice firm’s centralised investment or retirement proposition (CIP or CRP).

Today, the distinction between PPs and SIPPs has become blurred, with providers inconsistent in how they apply these labels to their pensions. Of the 134 personal pensions in the Defaqto database, 10% use the description PP in their name, 61% use SIPP, and 29% have ambiguous descriptions.

Due to adviser demand, Defaqto still separates PPs, and SIPPs based on fund option availability and different fee structures. 31 schemes appear in both data sets, with the simplest versions sitting on our PP table, and the more complex ones sitting in our SIPP table.

To illustrate the investment options in SIPPs: among the 115 individual schemes we report on, 78 facilitate investments in a DFM, of those 18% provide a panel for selection, 37% allow any DFM (subject to due diligence), and 45% offer both options.

A common misconception is that SIPPs are primarily used for investment in commercial property. In reality, only 27% of SIPPS allow investment in commercial property, down from nearly 40% before the Consumer Duty.

From an advice perspective, it’s important that like-for-like comparisons are made. Also, that the version of pension recommended is the same one that appears in the illustrations and suitability report. This is unfortunately a common mistake the FCA see being made. 

The wider market

While we’ve looked at the core defined contribution (DC) pension there are still other types available. These include small, self-administered schemes (SSAS), group additional voluntary contributions (group AVC) and trustee investment plans (TIP). 

Each holds a unique selling point and should be considered for clients seeking a more complex, non-standard solution. Each can be researched on Defaqto Engage.

Things to look out for

Advisers should be aware of four significant market shifts:

• Introduction of Illiquid and Private Equity Holdings. The Mansion House Compact requires signatory schemes to allocate at least 5% of their default funds to unlisted equities by 2030. This change is already increasing the risk profile of funds. Advice firms should monitor this evolution to ensure their clients' investments align with their knowledge and attitude to risk, two crucial factors that seem to have been forgotten in the rush to take on these asset classes. 
• Value for Money Assessments. In essence, these combine a consumer duty fair value assessment with a fund review that includes governance, ESG, and performance. This is expected to apply to both FCA and TPR-regulated schemes and is going through Parliament.
• Collective Defined Contribution (CDC). Introduced by the Pension Scheme Act 2021, this new style pension sits somewhere between Defined Benefit (DB) and Defined Contribution (DC) schemes. Based on solutions already running in Holland it was championed through Parliament by the Royal Mail, but is only just being rolled out to specific groups of employees. 
• Robo and cyborg led solution creating opportunities for advice firms. Robo advice solutions have been around for the best part of a decade and we don’t anticipate this market changing much in the foreseeable future. 
  • Cyborg advice is a similar experience, and while they have automated fact finding, research, and reporting processes, the crucial difference and benefit is that they include qualified humans providing face-to-face on-screen meetings and personalised advice. Some of these services, like Pension Potential, can be white labelled by advice firms opening a new target market, source of clients, and income stream.

 

Conclusion

The UK pension market is a mature one, but is alive with innovation and opportunities for both advice firms and consumers.

This is especially true when it comes to taking benefits. The thematic review has made providing advice a little more prescriptive and complex. Conversely, robo and cyborg-advice tools are attracting a new group of consumers while giving advice firms new markets to operate in.