By Paul Waters, Head of Strategic Digital Solutions at Hymans Robertson
Putting aside the omnipresent fraud and opaque charges worries, in terms of retirement there are two themes taxing the FCA most:
Accumulation - “Consumers not getting a retirement income that they expect or that meets their needs.“
Decumulation – “Suitability of products and advice post freedom and choice”.
They do not mince their words:
“We see significant risk of harm in these markets – driven by consumers given responsibility for complex investment decisions through shift to DC and Freedom and Choice”.
“Consumers making unsuitable product choices in retirement could, collectively, lose £20 billion from unsuitable investment strategies over 5 years”.
Not only does the FCA see the risk, it also believes the industry is not providing the solutions it should be. It cites pensions and retail investments as products that can expose consumers to too much risk unknowingly, don’t always deliver value for money, and that are not consistently marketed clearly and fairly.
In addition, the access to guidance and advice is also highlighted as a current market failing:
“Our view is the investment distribution process and support network around it is not working well enough”.
So is all of that fair?
Well as always, it is easy to criticise and blame the industry, when the challenges are deeper and more complex than that.
It is a much-repeated truth that consumers don’t engage easily with retirement products, whether it be advised or non-advised, robo or face to face. The problem for providers is that in reality, the majority of customers don’t engage as they struggle to imagine what their needs will be 30-40 years from now. It’s hardly a surprise then, to find there are numerous examples where retirement income does not match an individual’s specific needs.
Market conditions are not helping either (even before the COVID 19 crash). Those people who have started saving more recently are seeing low and often negative real rates of return, compared to previous generations who generally saw more positive growth, according to the FCA's report. A tough starting place to encourage positive engagement from, which can at times feel like an unfixable problem!
Nevertheless, it remains our problem to deal with. And it’s in everyone’s interests that we tackle it head on.
Non-workplace retirement assets are set to grow from around £500bn today to well over double that in 10 years-time. No-one doubts the size of the prize in capturing part of that market and serving it effectively.
It’s an aspect that hasn’t escaped the attention of the ‘where there’s blame there’s a claim’ legal industry either.
Data from the financial ombudsman showed an 86% increase in complaints against SIPPs in 2018/19. There is growing evidence that part of this growth is driven from claims management companies looking for new avenues as the PPI honeypot has been emptied. A word of caution for everyone operating in this market there.
However, while it is impossible to get perfect outcomes for millions of UK consumers with little engagement from them, it is possible to do significantly better than the FCA's worst case examples today.
There are two strands to doing this:
Digital and data – over the past five years the technology and data insights to enable a richer, more personalised retirement experience for consumers has become much more accessible to the retail wealth market. Its applications lie across advised and non-advised propositions, from accumulation right through to end of life and inheritance planning. In adopting this sort of technology, advisers’ jobs become easier, D2C propositions become more powerful, and firms get the added benefit of much richer management information to improve (and evidence) their governance processes.
Consumer behaviour – as a highly regulated industry with many prescriptive rules around the information we must provide to someone, it’s not surprising it doesn’t always land well with the end customer. Periodically taking a step back and assessing what matters most to people, reflecting emerging social trends that are relevant (e.g. ESG in investments) and looking at behavioural science techniques, can lead to simple ways to tweak products and propositions and improve engagement from people.
With the FCA closely scrutinising this area in the year ahead and some specific requirements like investment pathways on the delivery roadmap, now is the moment to look outwards and identify those win-win development areas. Spend time now working to improve propositions to deliver better customer outcomes while enhancing your governance and risk protection to your business at the same time.
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