The FCA has previously expressed concern about consumers moving into drawdown and holding their funds in investments that will not meet their needs. The FCA is proposing that firms offer customers who do not take advice a range of investment solutions that broadly meet their objectives, otherwise known as 'investment pathways'. The FCA is also proposing that consumers’ pension investments are not defaulted into cash savings unless the customer actively choses this option. These measures are a part of the FCA’s wider pensions strategy, and follow from the Retirement Outcomes Review report in summer 2018.
The FCA is also announcing new rules on the 'wake up packs' that must be given to consumers as they approach retirement, and on the disclosure of charges by pension providers.
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.
'Our proposals on investment pathways will help non-advised drawdown consumers select from four relatively simple choices, designed to meet their broad retirement objectives so that they can maximise their income in retirement.'
The FCA estimates these changes could benefit people by up to £25 million a year.
Helping consumers engage with their pension
The FCA is proposing that firms will offer ready-made investment solutions (investment pathways) to the estimated 100,000 customers that enter drawdown without taking advice each year. Customers will choose from four objectives for their retirement pot - and be offered a solution based on their choice. Smaller drawdown providers will be able to refer investors to another provider or the Single Financial Guidance Body’s drawdown comparator tool. The FCA expects firms to challenge themselves on the level of charges they impose on investment pathways. If the FCA subsequently identifies issues with charges, it may move towards imposing a cap.
The FCA is proposing rules that will require firms to give consumers warnings about holding investments in cash and to improve disclosure of charges.
Information consumers receive in the lead-up to, and after, accessing their pension savings
The FCA is proceeding with the rules and guidance on information disclosure proposed in the summer. This includes amending the information that firms must give in the ‘wake-up’ pack provided to consumers as they approach retirement, the frequency of its delivery, and preventing marketing material from being included, to make it more impactful. Changes will also be made to the Key Features Illustration that consumers receive on entering drawdown to ensure the prominence of charges information and consistency in calculation of illustrations.
Ongoing communication and post-sale charges
There is no current requirement for firms to provide ongoing charges information in relation to pensions. To enhance transparency about fees and charges, and to strengthen scope for competition, the FCA is consulting on proposals to provide consumers with information on the actual charges they have paid on their pension pot over the year, expressed as a cash amount.
Next steps
The changes to ‘wake up’ packs, retirement risk warnings, reminder requirements and the annuity prompt come into force on 1 November 2019.
Changes which will cover making the cost of drawdown products clearer and comparison easier will come into force on 6 April 2020, subject to consultation.
For measures in the consultation paper, the FCA is inviting feedback from stakeholders by 5 April 2019 before finalising the rules.
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