The FCA’s Retirement Outcome Review, released on 28 June, found that 60% of consumers not taking advice about drawdown were not sure or only had a broad idea of where their money was invested.
Further, a third of consumers were wholly invested in cash with around half of these likely to be losing out on income in retirement.
To address these issues, the regulator has put forward a raft of proposal in the review, on which it is now running a six-week consultation.
Structure needed
“The FCA believes that a more structured set of options would help consumers to engage with the decisions they are making, consider what their retirement objectives are and ultimately end up with a more appropriate investment solution,” the regulator said in the review.
One of the major proposals it is considering is requiring that providers introduce “investment pathways”, which give simple choice structures that help consumers make better decisions.
Also, to protect consumers from poor outcomes, the FCA said it is considering requiring firms not to default clients into cash, unless they make an active choice to do so.
“The FCA found that, while consumers have welcomed the freedoms, some are at risk of harm. For example, the FCA estimates that some drawdown customers could receive 37% more retirement income from their pot every year by investing in a mix of assets rather than cash.
“Defined contribution pension pots will grow significantly in the coming years, so it’s important to put this market on a good footing and keep it under review.”
Three solutions
The FCA said in the review it thinks providers should offer three ready-made drawdown investment pathways “within a simple choice architecture”.
According to the regulator, these pathways will reflect the “standardised” objectives of a consumer:
- Wanting their money to provide an income in retirement
- Wanting to take all their money over a short period of time
- Wanting their money invested for a long period of time, but may want to dip into it occasionally.
“We expect firms to develop investment pathways with consumers’ best interests in mind, including appropriate charge structures and levels,” the regulator said.
“At this point, however, we do not know what the ‘right’ price for such pathways is. Firms should challenge themselves on the level of charges and use 0.75% on default arrangements in accumulation as a point of reference.
“For this reason, we plan to review investment pathways, including the charges applied to them, one year after implementation. If, at that point, we find evidence that firms are charging excessively, we will be highly likely to move towards a cap,” the FCA said in the review.
Industry comment
Tom Selby, senior analyst at AJ Bell, said given the level of pressure exerted on the FCA from various quarters, it felt inevitable some form of intervention would be proposed with the aim of protecting non-advised drawdown savers.
“We are pleased the FCA hasn’t jumped in with both feet in this regard and will instead consult on the idea of introducing default investment pathways.
“This is absolutely the right approach because default investment pathways that are not a personal recommendation would be a very significant development and needs careful consideration,” Selby said.
He said successful navigation of drawdown requires engagement and care needs to be taken that creating blanket defaults doesn’t simply hard-wiring inertia into the system.
Steven Cameron, pensions director at Aegon, said he believed the FCA was right to allow pension freedoms to bed in before making decisions around where further remedies are required.
“They have rightly identified ‘non-advised’ customers as most in need of additional support, which is a ringing endorsement of the benefits of at retirement advice.
“Those who go it alone run the risk of failing to understand their options as they approach and enter retirement, may pick a product with less competitive charges or may invest inappropriately, for example in cash when long term growth is required. Without advice many also struggle to take an income that allows for their life expectancy,” Cameron said.
