The Financial Conduct Authority (FCA) recently launched a new consultation paper following the findings of its Retirement Options Review published last year.
As those of you who take an interest in such matters will know, the regulator seldom uses ten words when ten thousand will do, and trying to summarise 122 pages in a few lines is a thankless task. But in summary, the main findings of the original review were as follows:
• Customers by and large have welcomed the freedoms and are making use of them, with a substantial increase in the number of people taking DC pots earlier and making use of drawdown;
• A surprising amount of pension pots (over half) have been fully withdrawn, though most were under £30,000 and the vast majority of customers have other private pension provision;
• There has been a significant increase in the number of clients taking up drawdown arrangements, which are now twice as popular as annuities;
As ever with Consultation Papers, there is a ‘but’ coming here. The regulator concluded that:
• There are weak competitive pressures and low levels of switching. Most consumers choose the ‘path of least resistance’, accepting drawdown from their current pension provider without shopping around;
• One in three consumers who have gone into drawdown recently are unaware of where their money was invested;
• Some providers were ‘defaulting’ consumers into cash or cash-like assets, though holding cash is unlikely to be suited for someone planning to draw down their pot over a longer period;
• Consumers might pay too much in charges. We found that charges for non-advised consumers vary considerably from 0.4% to 1.6% between providers, and are, on average, higher than in accumulation (where in some cases they are capped at 0.75%);
• Drawdown charges can be complex, opaque and hard to compare;
• So far, we have not seen significant product innovation for mass-market consumers.
Concerns have also been expressed that providers are leaving the open annuity market, reducing choice for customers who are trying to shop around. However, the FCA did also state that its research had not identified significant regulatory barriers to innovation and that this is likely to develop over time. It must be borne in mind that the freedoms are still a relatively recent innovation in the context of hundreds of years’ worth of pension and investment history. The financial services industry can never be accused of moving quickly at the best of times and given the increased pension pot sizes likely to develop as auto-enrolment takes hold, it might be reasonable to conclude that the cheque is in the post on this front.
So back to the latest developments. The FCA’s main concern in this paper is stated as protecting consumers from poor outcomes. To quote from the horse’s mouth: ‘we found that many consumers struggled to make investment decisions, or were insufficiently engaged to do so. This was leading to consumers either ending up in their drawdown provider’s default option or making a poor investment choice because their drawdown provider didn’t provide a solution that was easy to understand or navigate’.
What is the regulator doing about it? The new paper proposes a range of ‘investment pathways’, or put another way, simplified, broad brush investment approaches, which are a mass market offering, suitable for customers with very basic needs. Whilst there is the usual blurb about not being intended to offer an optimal solution for every customer in every set of circumstances, the intention is that there will be a limited set of model options which will serve to suit the needs of the majority. There are three broad scenarios which the regulator specifically addresses; consumers who want their money to provide an income in retirement, consumers who want to take all their money over a short period of time and consumers who want to keep their money invested for a long period of time and may want to dip into it occasionally.
One recurring theme identified is the issue of clients taking their tax-free cash and leaving the balance in drawdown designated to cash-style assets where they have no pressing need to access the funds. Over the longer term, such an approach is likely to lose out on significant investment growth. However, the consultation also considers the needs of customers who are advised and/ or sophisticated – the proposals specifically advise the exemption of SIPPs from the pathway approach. Independent Governance Committees are also proposed in order to ensure providers are making a fair attempt to deliver good value for money. In light of concerns raised about weak competitive pressures and low levels of switching, ensuring providers deliver a value proposition is a key driver for the FCA and with good reason.
Worryingly, the paper also states that the trend towards withdrawing pension monies to be held elsewhere stems from a ‘lack of trust in pensions’. Be this the case as it may, it demonstrates a fundamental lack of understanding of the basics of personal finance. Quite how people come to mistrust something which is in effect nothing more than a tax efficient wrapper escapes this writer. If clients are proposing to invest the funds elsewhere then they will face the same risks with none of the same, or limited, tax benefits. And hoarding in cash as outlined above demonstrates ignorance of a key financial principle; over time, asset backed investments consistently outperform deposit based ones. On the plus side, SIPP platform provider AJ Bell recently concluded that there was no evidence that funds were being withdrawn to buy Lamborghinis, with a significant proportion being used to pay down debt. It may be an old chestnut, but it is also a fundamentally prudent financial principle and shows that some logical decisions are being made out there.
The paper also proposes measures aimed at improving customer engagement with the retirement decision making process. Whilst the ever-present risk of information overload is acknowledged, the FCA proposes the following measures:
• To introduce additional trigger points for ‘wake-up’ packs to include a pack at age 50 and then every 5 years until consumers have fully crystallised their pension pot;
• To introduce a single page summary document into the ‘wake-up’ pack;
• To introduce additional retirement risk warnings alongside ‘wake-up’ packs;
• To prevent firms from including marketing material alongside the ‘wake-up’ pack and reminder information;
• To strengthen the messaging in the reminder to encourage consumers to access pensions guidance
Whilst the FCA acknowledges that standard annuity sales have declined as a result of the freedoms, there are still a significant number being taken each year by risk averse investors with defined contributions pots. The FCA has proposed a range of measures to be taken by firms, with specific reference to those providing income driven as opposed to purchase-price driven annuity quotes. The measures, in summary are as follows:
• To require firms to ask consumers who express an interest in purchasing an annuity, questions to determine whether they are potentially eligible to purchase an enhanced annuity;
• To require firms to use the enhanced annuity information, where relevant, to generate a market-leading annuity quote;
• To amend the information requirements in the annuity comparison template to remove the additional narrative referring to enhanced annuities;
• To amend the information requirements in the annuity comparison template for income-driven annuity quotes including reversing the information for the net annuity purchase amount and annual income.
Whilst there does not appear to be anything earth-shattering, outrageous, or even overly contentious in the paper, it does evidence that in addition to the furore surrounding DB transfers, retirement planning in general remains high on the regulator’s agenda. The closure date for responses, for anyone who is interested to those lengths, is 9 August 2018 for ‘discussion’ points and 6 September 2018 for ‘consultation’ points. Final handbook text is due January 2019.