Multi-assetJul 19 2017

Drawdown cost cap idea threatens fees

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Drawdown cost cap idea threatens fees
The regulator is considering forcing providers to offer default drawdown products with capped fees

Pressure on portfolio management fees could increase further after the FCA raised the prospect of a cap on the cost of income drawdown schemes for non-advised retirees.

Last week the FCA published the interim report of its retirement outcomes review, an analysis of how pension freedoms have changed the way retirees access their pension pots. Noting a significant spike in the use of drawdown products, the regulator said it was considering the introduction of “default investment pathways”, prices for which would be capped at a certain level. 

Though the default options and price cap would apply to non-advised savers only, some suspect it would have the effect of setting a new benchmark for all products used in drawdown. 

Rob Morgan, an analyst at wealth manager Charles Stanley, said the imposition of a default drawdown scheme and a price cap would see “market dynamics change”. 

Hargreaves Lansdown head of policy Tom McPhail said: “There are some serious issues with a charge cap. Undoubtedly a price cap would bring pressure to bear across the board, on advisers, product providers and fund managers.” 

Providers would likely be affected more than most. Savers presented with the default pathways would have the option of selecting other products, the FCA said. 

But few consumers have sought alternatives in other parts of the market: Nest, the UK’s largest auto-enrolment provider, has 99.9 per cent of its savers in the default product, charges for which are capped at 0.75 per cent. 

Chris Hannant, a strategic adviser at the Personal Investment Management & Financial Advice Association, said he was not convinced by Mr Morgan and Mr McPhail’s concerns. 

“Introducing defaults is opting for the status quo rather than trying to change it – and would be a reflection of what we have seen for the last two years.

“I don’t think there will be a great deal of impact. The client base advisers have already sought advice.” 

The watchdog’s concerns stem from consumers’ post-pension freedom shift from the guaranteed incomes provided by annuity products to more complicated drawdown options. 

“Decisions about how to manage a drawdown product are complex: consumers have to manage their own investment and withdrawal strategy and also consider how long their pension savings will have to last,” its report said.

The FCA  noted “limited innovation” from providers regarding products which blend the certainty of an annuity and the flexibility of income drawdown. “We have [also] not seen much technological innovation, such as ‘robo advice’,” the watchdog said. 

“The main barriers to innovation are the pace of policy change, uncertainty about how the market may develop in the future, consumer inertia and the fact that most pots are currently relatively small,” it added.

Mr Morgan said the FCA’s description of the situation was accurate but questioned the ease of providing a product that combined annuity and drawdown characteristics. 

“No one has come up with a mass market ‘third way’. To actually have a product that can generate a sustainable income has never been harder. I would put it down to the environment rather than a reticence from providers.” 

Mr Hannant said: “The FCA’s criticism speaks to the fact there is not one single product that can do [everything]. So it comes back to the size of the pot. If you’re looking for a single product that does everything, I think the fundamental problem is the size of the pot.”

Regulator’s remedies to support reforms 

• Additional protections for non-adviser drawdown investors, such as default pathways, a charge cap and extending the independent governance remit. 

• Promote competition for potential non-advised drawdown investors by promoting “shopping around”, switching and comparison tools. 

• Requiring drawdown providers to include a summary cost metric in their consumer communications to avoid “complex, opaque and hard to compare” fees. 

• Allow investors to take savings early without having to purchase drawdown products as current system promotes an “uncompetitive environment”.

IN NUMBERS

30% 

Proportion of non-advised investors going into drawdown products 

5%

Proportion doing so prior to the introduction of pension freedoms in 2015