The industry will need to develop appropriate mass market distribution and guidance arrangements for products with a drawdown element to insure consumers understand the risks involved, the Financial Conduct Authority said.
In its retirement income market study, published today (11 December) alongside an annuities thematic review, the regulator revealed that this year income drawdown sales have increased in value by 47 per cent to £1.8bn.
Some 88.2 per cent of those sales were with independent advice, 9.2 per cent with restricted advice, and 2.6 per cent on an execution only basis.
Market research suggested that income drawdown sales are likely to continue to grow if annuity rates remain at current levels and consumers take a more risk-tolerant approach to their pensions once they have more control over their options from April 2015.
Prior to the landscape changes announced in the Budget, 95 per cent of income drawdown was sold through a personal recommendation and typically to higher net-worth consumers.
The FCA said it was aware that more simplified drawdown products may be brought to the market, potentially being sold through sales channels that do not involve a personal recommendation, such as execution-only.
As a consequence, the regulator said the industry will need to develop appropriate mass-market distribution and guidance arrangements for products with a drawdown element.
“Without this, consumers may not properly understand the risks involved and risk may not be shared appropriately between consumers and suppliers. Higher risk products must be sold responsibly.”
The FCA said drawdown products which offer a limited selection of funds to choose from are expected to be directed at mass market customers on a predominantly execution-only basis through direct to consumer distribution channels.
Multi-asset and diversified growth funds should be used to manage volatility and some investment risk for consumers in these ‘managed drawdown’ products.
The regulator’s view on product innovation is that it will be focused on six different areas, including income drawdown. It expects to see developments in underwriting of lifetime annuities, with more personalised underwriting for both internally vesting and ‘open market option’ customers.
Its customer research has identified that in addition to flexibility, consumers will also value products that offer an element of guarantee.
Hybrid products such as fixed-term annuities, investment-linked annuities and variable annuities are expected to be re-branded or launched, with guarantees and the price attached being more modularised, so people can pick and choose.
The FCA expects these products to be targeted more towards mass-market customers than they have typically been up until now.
Advisers and providers are also expected to use blended solutions which cover differing consumer needs, such as an annuity to cover living costs and drawdown exposing customers to investment growth and risk.
The regulator also suggested that providers offer a number of products that can be used ‘back to back’, such as drawdown as a ‘bridging product’ while income needs are flexible, followed by the purchase of a lifetime annuity later in life for the security of a guarantee.
Cash-based products are also going to be a focus for innovation. The FCA said that given the large numbers of consumers who will draw down their pensions into cash, it anticipates this may lead to the development of cash-based products in other markets, such as platforms and banks.
It also expects firms to develop the capability to offer consumers the new uncrystallised lump sum option on existing pension schemes.
In terms of distribution, the FCA expects to see more innovation in direct to consumer business models, digital consumer engagement, and retirement advice including direct advice services from providers as well as growth of financial advisers and wealth managers.
It also emphasised that the market study and annuities thematic review revealed people are still not shopping around.
With far more flexibility and options set to come in from April 2015, the watchdog warned there was a concern that it may be harder to prompt savers to shop around. The FCA also warned against providers introducing “undue contractual or financial barriers to switching”, as they try to retain customers through their retirement.
Responses are due by the 30 January 2015, with a final report expected next year.
donia.o’loughlin@ft.com
