In addition to the annuities reforms, the FCA will seek to instigate behavioural work to assess how consumers are using pension freedoms and how providers are ‘framing’ choices to customers in light of the new access options.
In particular, it is concerned that the option of taking cash from a fund using ad hoc lump sums, the ‘uncrystallised funds pension lump sum’, will become an effective default for many smaller pot consumers that will largely be offered without formal advice.
In a 74-page retirement income market study published today (26 March), the Financial Conduct Authority states it will introduce new rules for providers to support consumer choice, responding to “longstanding concerns” which have “new urgency” in light of the pension reforms.
To remedy this, the FCA tells firms to provide annuity quotation comparisons so that, once a consumer has decided to buy an annuity they can easily identify if they could be getting a better deal by shopping around and switching provider.
The regulator says this will increase consumer awareness of the benefits of shopping around. This information should be provided using annuity price comparison websites, such as the Money Advice Service, to provide quotes for a particular consumer.
Responding to feedback that this would create a de facto default of going into an annuity despite pension freedoms diminishing the domination of this product, the regulator adds there is also the need to develop similar comparison tools for income drawdown and other new products.
Providers were told it will be in 2016 that they will be required to reveal their annuities ranking.
On cash lump sums, the study states: “With some consumers looking to withdraw their income rapidly over a short period, transferring customers into new drawdown arrangements will come at a cost to many providers and UFPLS offers an easier solution for handling these requests.
“We expect UFPLS to be largely offered without a personal recommendation and typically being used by consumers with smaller pots. There is a risk that the benefits of other options... are not adequately explained to consumers and that UFPLS is potentially used as a default option.”
In the longer term, the FCA says it is in discussions with government to explore the most effective and efficient way to develop a ‘pensions dashboard’, with a view to implement this over the next few years.
The regulator notes the development of a dashboard solution could build on the experiences of other countries such as the Netherlands.
