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Hymans Robertson and Canada Life comment on the FCA's retirement Outcomes Review consultation |
Andrew Tully, Technical Director, Canada Life, comments on the policy and consultation documents:‘Four years ago, freedom and choice turned the retirement savings market on its head. Given the pace of change, it is hardly surprising there would be a number of issues emerging which would require regulatory intervention. The FCA has found consumers entrenched with their holding provider, seemingly unwilling, or without the knowledge, to switch their provider. Weak competitive pressure and low levels of engagement are particularly acute in the non-advised drawdown market and the regulator is rightly focussing on a package of measures to help address this. ‘To illustrate the point, 94% of consumers who access their pots without taking financial advice accept the drawdown option offered by their pension provider, compared to only 35% of advised customers. This shows the huge benefit people receive from seeking independent advice.’
Changes to ‘Wake-up packs’
‘Keeping things simple will help with engagement. The pensions passport, the one page summary of benefits, will help hugely here.’
Eligibility for enhanced annuities
‘Around 70% of consumers should qualify for a better income because of health or lifestyle factors, so the change to annuity prompts requiring firms to ask more relevant questions to generate a competitive quote is a positive development.’
Charges
‘Drawdown charges can be opaque, complex and often difficult to compare. This clearly doesn’t help when consumers are trying to make comparisons if they do shop around. Clearly drawdown is not a one off purchase, so people can switch, but the evidence shows people are unlikely to do so. It will be interesting to see how the introduction of an annual pounds and pence charge figure changes behaviour. The drawdown comparison tool has merit, but the challenge here is the complexity, and to get a proper comparison will require many input fields which the average person is unlikely to complete.’
Default cash
‘The regulator has sounded the alarm bell over the significant number of people sleepwalking into cash or cash like assets. Overall, a third of non-advised drawdown customers are wholly holding cash, which may feel safest in a period of uncertainty but longer term is very unlikely to provide the best retirement outcome. The FCA proposes that customers accessing drawdown for the first time will have to make an active decision to be in cash.’
Investment pathways
‘Ready-made drawdown investment solutions will be like the ready-meals of retirement. They are unlikely to satisfy for long and certainly won’t be winning any Michelin stars. There will be in-built limitations around risk to be appropriate for the widest range of consumers with fairly straightforward needs. Most people will want a perfect outcome for their individual retirement objectives and this is far more likely to be delivered through seeking proper regulated financial advice.’
The FCA has increased the number of investment pathway objectives (from 3 to 4) with a corresponding increase in investment solutions (basically one investment solution for each investment pathway objective) as follows:
Option 1: I have no plans to touch my money in the next 5 years
Option 2: I plan to use my money to set up a guaranteed income (annuity) within the next 5 years Option 3: I plan to start taking my money as a long-term income within the next 5 years Option 4: I plan to take out all my money within the next 5 years
And in addition, only for non-advised consumers, proposed rules requiring providers to offer investment pathways will apply when:
• a consumer moves all or part of their pension savings into drawdown, or • a consumer transfers funds already in drawdown into a new drawdown arrangement unless they have received advice about either of these transactions.
FCA Retirement Outcomes Timeline
- Terms of reference published in June 2016, which looked at how the retirement market is evolving following the introduction of freedom and choice in April 2015
- Interim report and open consultation published in July 2017 - Interim report and consultation closed in September 2017 - Final report published in June 2018, which also included a consultation paper (CP18/17) suggesting a set of remedies for issues identified - PS19/1 published January 2019, introducing a set of remedies to address market issues (to be introduced by 1.11.19) - CP19/5 also published in January 2019 seeking views on investment pathways and other rules and guidance for non-advised drawdown consumers (to be introduced in April 2020)
Reacting to the FCA’s Retirement Outcomes Review consultation, Mark Jaffray, partner and head of DC consulting at Hymans Robertson comments:“The FCA’s long-awaited proposals following the Retirement Outcomes Review are essential for people which are overwhelmingly unsupported and underserved with the life-changing decisions they are now expected to make at retirement.
“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.”
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