The Financial Conduct Authority (FCA) yesterday (28 January 2019) launched a consultation on proposed measures designed to protect retirement income when individuals access pension freedoms.
The consultation, which will be collecting feedback from stakeholders until 5 April 2019, proposes that pension scheme members who do not take financial advice should be offered a selection of investment pathways, designed to broadly suit their objectives. Members will be able to choose from four objectives, and their investment option will then be matched to their choice.
The FCA further recommends that pension investments are not defaulted into cash savings unless the member actively chooses to take this path.
Steve Webb, director of policy at Royal London, said: "The big outstanding challenge around pension freedoms is not people with large pots blowing the lot on a sports car, but is about more inexperienced investors with smaller pots leaving them invested in cash for long periods of time or withdrawing them altogether.
"These FCA rules are a sensible response to the risk of savers sleepwalking into seeing their hard-earned savings eroded by sitting in low-return cash investments. But there is still a problem where people cash out the whole pot and transfer it into a cash [individual savings account] or current account. It is clear that reckless caution, not Lamborghinis, is the big outstanding challenge with pension freedoms."
The consultation will also discuss the information included in wake-up packs, which are given to members as they approach retirement. Changes that are being reviewed include the frequency of the wake-up packs' delivery, the move to prevent marketing material being included and amends to the key features illustration that members receive when entering drawdown.
The FCA further seeks to enhance transparency around fees and charges by providing members with information on charges they have paid on their pension pot over the year, expressed as a cash amount.
Mark Jaffray, partner and head of defined contribution (DC) consulting at Hymans Robertson, said: "The industry needs to start viewing drawdown as a service rather than a product. People are crying out for more affordable access to advice or guidance around their pension options and personalised investment solutions based around their individual goals will help to provide that. The FCA’s proposal to introduce default investment pathways will be an important step in the right direction, as long as costs are kept low and clearly communicated throughout.
“Greater transparency around charging will be a welcome benefit for many. Explaining a clear first year charge in pounds and pence will allow consumers to compare offers more easily across a number of providers and encourage them to actively shop around as a result.
"However, it’s important that the FCA doesn’t stop there. We are already seeing parallels in drawdown with the sale of annuities products prior to 2017, where despite an open market option, consumers rarely looked around for the best deal. The FCA addressed this problem by forcing providers to share details of the best available quote in the market for an annuity, actively promoting the value from shopping around. Given that the vast majority of people now opt for drawdown over an annuity product, it’s madness that we don’t have the same measures in place.”
The measures featured in the consultation form part of the FCA's wider pensions strategy and follow on from its Retirement outcomes review report, published in the summer of 2018.
Proposed changes to wake-up packs, retirement risk warnings, reminder requirements and the annuity prompt are expected to be effective from 1 November 2019. Amendments concerning making the cost of drawdown products clearer and making comparisons easier will be implemented from 6 April 2020, subject to consultation.
Christopher Woolard, executive director of strategy and competition at the FCA, said: "The pension freedoms give consumers more flexibility in how and when they can access their pension savings, but that also means they have to make more complicated choices.
"Our Retirement outcomes review identified that many consumers are focused only on taking their tax-free cash and take the path of least resistance when entering drawdown. This can often mean that the rest of their drawn down pension pot is not invested in a way that meets their needs and intentions. We found that around one in three consumers who have gone into drawdown recently are unaware of where their money is being invested. This leads to poor consumer outcomes."
Tom McPhail, head of policy at Hargreaves Lansdown, said: "The FCA was presented with a huge regulatory challenge when the former chancellor tore up the retirement rule book in 2014. The pension freedoms have bedded in and are working well, but this review has rightly identified [that] more can be done to help investors make the most of their retirement savings."
