PensionsJun 28 2018

Regulator plans to force ‘ready-made drawdown’

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Regulator plans to force ‘ready-made drawdown’

The Financial Conduct Authority (FCA) is planning to force providers to offer their customers easy to access ready-made drawdown investment products, in a bid to prevent them from sticking their money into cash.

The proposal is part of a raft of measures included in a consultation paper out this morning (28 June) aimed at making retirees do the best they can with their pension pots, including by nudging them earlier to make a decision about their best egg, and making pension companies clarify costs in pounds and pence not percentages.

The regulator stated it wants to help people be more engaged with their investments at retirement and to prevent savers going into cash investments by default, which can mean missing out on significant extra pension income.

It said it had seen little evidence of people drawing down too much so they run out of money early but found some drawdown customers could receive 37 per cent more retirement income from their pot every year by investing in a mix of assets rather than cash.

Under FCA plans new consumers opting for non-advised drawdown will be offered at least one default investment ‘pathway’ by their pension provider, with a high-level objective and the strategy it will use to achieve it.

The regulator believes because of the different groups of consumers with different needs, firms might decide to offer more than one default investment option, which makes it different to proposals made by the Work and Pensions select committee earlier this year.

MPs had called for a single default drawdown to be introduced but the government rejected this idea this month.

Providers will be expected to have a strategy for dealing with consumers who have already been defaulted into cash.

The regulator also wants to drawdown options to be good value for money after finding charges vary considerably from 0.4 per cent to 1.6 per cent between providers and can often be hard to compare.

Although it has shied away from introducing a charge cap on drawdown as previously floated, it said it would introduce it if firms fail to come up with ‘appropriate’ charge levels on their investment pathways.

The FCA is unclear what charges firms should aim for but said they should use the 0.75 per cent cap on default arrangements in accumulation as a point of reference.

To help consumers compare costs the regulator proposed firms’ key features illustrations should include a one-year charge figure in pounds and pence. 

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.”

The regulator also wants to reform the wake up packs sent to customers nearing retirement.

It wants them to be sent earlier in the process, from age 50 not 55, and every five years thereafter until the pot is accessed, and to include risk warnings from age 50 onwards.

It also wants firms to incorporate a one-page ‘headline’ document, in “clear and accessible” language.

Providers have mainly welcomed the proposals, although some had reservations about their appropriateness.

Tom McPhail, head of policy at Hargreaves Lansdown, said: “The pension freedoms are popular and working well but investors often need help and guidance in managing their retirement savings, these proposals will help address these needs.”

Nigel Peaple, director of policy and research at the Pensions and Lifetime Savings Association (PLSA), said: "It’s absolutely right the regulator is consulting on introducing ‘investment pathways’ where providers would offer a small number of options that meet the majority of people’s needs.”

Ben Franklin, assistant director of research and policy at the International Longevity Centre – UK said: “Investment pathways to prevent particularly sub-optimal drawdown outcomes is a useful development.”

Steve Webb, director of policy at Royal London, said the FCA’s recommendations were proportionate and balanced.

He added: “We welcome the move to contact savers earlier before retirement about their options. Royal London recently starting sending ‘wake-up’ packs to savers five years ahead of retirement, and the FCA recommendations will build on this direction of travel.”

But Andrew Tully, pensions technical director at Retirement Advantage, said he was “not a fan” of default retirement pathways.

He said: “A big challenge will be to design these pathways to ensure as people’s circumstances inevitably change as they move through retirement, they remain appropriate.”

Tom Selby, senior analyst at AJ Bell, welcomed the FCA’s decision to consult on the changes, not outright introduce them.

He said: “This is absolutely the right approach because default investment pathways that are not a personal recommendation would be a very significant development and needs careful consideration.

“Different people have very different personal circumstances and so there needs to be full consideration given to how investment pathways will be implemented and monitored over time.”

carmen.reichman@ft.com