The consultation accompanies the publication of the final report of the Retirement Outcomes Review, the FCA’s in-depth look at how the pensions and retirement income sector has been working since the pension freedoms were introduced in 2015. 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.
The measures will help consumers at key points when they make decisions about what to do with their pension pot, as well as providing ongoing support to consumers once they have accessed their pension savings. They include improvements to the clarity and timings of communications prior to people making decisions about what to do with their pension pot, simplifying the options that people have, and the ongoing communications people receive.
Christopher Woolard, Executive Director of Strategy and Competition at the FCA said: “We know that the choices introduced by the pension freedoms have been popular with many consumers. However, they’re now required to make more complicated decisions than ever before. Many people need more support when making choices. The measures we have outlined today will help them think about that earlier, create investment pathways to help them with their choices and make costs and charges easier to understand.
“This is an important market that is still relatively new and is continuing to evolve. This is not the end of the work we are doing and we will continue to keep the market under review as it develops.”
Talking about pension choices earlier
The FCA is proposing that ‘wake-up’ packs should be sent to customers from the age of 50 and then every five years until the customer has fully accessed their pension pot. The new ‘wake-up’ packs will have to include a single page summary, sometimes called a ‘pensions passport’ and firms will also have to include specific retirement risk warnings at the same time as the new packs.
The new communications will be designed to address this lack of consumer engagement and help consumers engage with the risks and choices they face and prompt them to access the support and guidance they need.
Measures designed to help consumers when they access their pot
The FCA is inviting views on the introduction of investment pathways for customers at the point of entering drawdown. 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 FCA also believes that firms should ensure that consumers make an active choice to be invested in cash.
In its report, the FCA 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. A third of consumers were wholly invested in cash with around half of these likely to be losing out on income in retirement.
The FCA wants drawdown options to be good value for money. To help consumers compare costs and drive good value for money, the FCA is proposing that firms include a one-year charge figure in pounds and pence in the key features illustration they provide to consumers. The FCA found that charges vary considerably from 0.4% to 1.6% between providers and can often be complex, opaque and hard to compare. If firms fail to introduce investment pathways with appropriate charge levels, the FCA has not ruled out introducing a cap on drawdown charges.
Measures designed to help consumers after accessing their pot
The FCA is proposing that all consumers who have accessed their pension should receive information from their provider annually, whether or not they are currently drawing an income from their pot. The FCA also believes that this information should include the actual charges paid in pounds and pence. The FCA found that currently some consumers do not receive annual information and for many who do, information on investment returns and annual charges is not given.
Next Steps
For some of these measures the FCA is consulting on proposed new rules. Other interventions, such as investment pathways, require further work to get the detail of implementation right across the full range of businesses affected. The FCA is therefore seeking views on this before finalising the approach.
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