The Financial Conduct Authority (FCA) announced it will undertake a thematic review assessing how financial adviser firms are delivering retirement income advice and assess the quality of outcomes consumers are getting.
The UK regulator had previously planned work on this topic, which was known as ‘Assessing Suitability Review 2’ – but this was paused to allow resources to be concentrated on its response to covid.
This newly-established thematic review will examine how the retirement income advice market is functioning. It will also focus on how firms are responding to changing consumer needs as a result of the rising cost of living.
The FCA will use the findings to help inform its future strategy for the sector. The results will also be an “important indicator of how firms are implementing the Consumer Duty”, the regulator said.
This review comes after the introduction of the government’s pension freedom reforms in 2015. They changed the way consumers access their retirement savings and the rise in demand for decumulation advice.
The FCA said: “Given the wider range of retirement options available, it is vital that consumers get good advice at the point they first access their pension savings and, where relevant, on an ongoing basis.
“Since 2015, there has been a significant shift to consumers drawing an income from pension funds which remain invested. Advice in this area can be complex, so it is important firms understand the needs of their consumers and ensure their advisory solutions deliver consistently suitable advice.”
It will begin the review in Q1 2023 and aim to publish a report setting out its findings in Q4 2023. Firms selected for the review can expect to be contacted early in 2023, when the FCA will also engage with trade bodies.
‘Bellwether’
Jon Greer, head of retirement policy at Quilter, said: “Pension freedoms radically changed the retirement landscape and have no doubt been instrumental in helping to give people more choice and flexibility in retirement. But with greater choice, comes more complexity and it is right that this thematic review announced by the FCA looks at how financial advice is helping consumers navigate these difficult and often perilous decisions.
“Planning your retirement is one of the most important decisions of your lifetime and financial advisers have a hugely important role to play in helping people make the best of their pension savings and ultimately accessing the best possible retirement. Making the wrong choice could make the difference between someone enjoying a fulfilling retirement and one where they are struggling to make ends meet.
“While new initiatives such as investment pathways make it easier for unadvised savers to choose investment solutions aligned to their specific desires and drawdown objectives, they are no substitute for financial advice. Everyone’s financial make up is different as well as their financial objectives, and advice often helps those who live well below their means for much of their retirement unnecessarily by illustrating exactly how much they can afford to drawdown without fear of running out.
“The results of the review from the FCA will also be a bellwether for how well firms are implementing Consumer Duty as the new regulation requires advice to be outcome-based and avoid foreseeable harm. Advisers will no doubt have an eye on how they document their advice and the solutions they use through the consumer duty lens with particular emphasis on protecting their customers from foreseeable harm.
“However, the government must also look at some of the other aspects of the pension system to see if they are working as they should too. The Money Purchase Annual Allowance, for example, is a contradiction to the principles of freedom and flexibility and government should consider whether it is achieving the desired outcome and explore whether a general anti-abuse approach could work better than the rigid, strict approach currently employed.”
Complex
Steven Cameron, pensions director at Aegon, added: “After a pause for the pandemic, the FCA has announced it is recommencing its thematic review into retirement income advice, although with little detail on scope. The timing now overlaps with an intense period of preparing for the new Consumer Duty which is likely to lead to some changes in adviser retirement advice propositions.
“Retirement advice is central to many adviser businesses and is one of the most complex – as well as valuable – areas of financial planning. Advisers need to help their clients navigate many uncertainties including future and varying income requirements, short- and long-term investment returns, inflationary trends and, of course, how long clients might live.
“In new Consumer Duty terms, this presents many foreseeable harms which advisers will be considering as part of delivering good outcomes. Some such as running out of money too soon, or taking less income than is sustainable, can be in conflict.
“While preparing for the new Consumer Duty, we expect many adviser firms will be reviewing their retirement income advice propositions and we hope the thematic review will allow for these. While it may be difficult to completely avoid all potential foreseeable harms, we expect advisers will be making all of these clear to clients so they can agree which need avoided as priority.”
Claire Altman, managing director for retirement income at Standard Life, said: “Decisions regarding retirement income are some of the most complex financial choices individuals face. Pension freedoms triggered the move from simplicity and security (albeit at a price) to complexity and choice, including the chance to make bad choices. The numbers of people retiring with DC savings will only increase following the massive success of auto-enrolment.
“But we need to remember that DC was not chosen by policy makers because they wanted to give individuals the responsibility of managing their own financial retirement decisions but was a by-product of the move away from DB once it was no longer affordable for sponsors. We have not yet as an industry properly grappled with the full implications of that decision by policy makers – over 50% of retirees do not currently have help with managing their financial decision making at retirement.
“Those currently supported by an adviser are well placed to navigate the challenges associated with managing their retirement income such as determining an appropriate withdrawal rate from a drawdown fund, market volatility and longevity considerations.
“But we need to make sure that those people who are not currently supported by an adviser get access to some kind of help. Now is a good time to look again at how the retirement income advice market has developed particularly as the tables have turned and we have now entered a period of higher annuity rates so retirees have a greater chance of being able to benefit from income certainty in retirement as well as flexibility.”
