The Financial Conduct Authority is concerned about providers dragging their heels to switch pre-2012 pension investment strategies.
More than two years since pension freedoms were introduced the Financial Conduct Authority has found providers are still reviewing pre-2012 retirement saving investment strategies.
Following the 2015 pension freedom reforms, which stated pensions no longer had to be converted into an annuity, the FCA told providers and advisers to review the appropriateness of lifestyle investment strategies.
Historically, many pension lifestyle investment strategies were designed to target an asset mix immediately before a customer’s nominated retirement date to broadly match the tax-free cash and annuity purchase most customers made.
Following the 2015 pension reforms, with fewer customers choosing to buy annuities, the regulator wanted to see providers changing their strategies to reflect these investment profiles no longer being appropriate for many customers.
The regulator spoke to and gathered information in the fourth quarter of 2016 from 13 providers, accounting for about nine million customers in lifestyle investment strategies.
For new business and post-2012 auto-enrolment contracts, the FCA found most firms had reviewed the appropriateness of lifestyle strategies for new business and created new default funds and lifestyle glidepaths.
However for business likely written pre-2012, the regulator found most providers were still reviewing, or have plans to review, this business over the course of 2017.
We are concerned at the timeliness of these reviews, particularly for customers approaching or having already entered their de-risking phase.A spokesman for the FCA said: “We are concerned at the timeliness of these reviews, particularly for customers approaching or having already entered their de-risking phase, and the lack of clear communication to these customers explaining how their lifestyle strategy relates to their retirement options following 2015’s pension reforms.
“Many firms are considering migrating customers to new funds with lifestyle investment strategies not targeting an annuity purchase, and firms’ preferred option is to move customers by ‘deemed consent’.
“Firms typically demonstrated they have undertaken modelling (for example, stochastic, actuarial) identifying how different customer outcomes will be impacted.
“This includes identifying customers near their retirement date, any charges they may incur and whether they may be worse off.”
For legacy business that is likely to have been written before 2001, the FCA stated it was concerned that providers’ plans for reviewing this business are on a “slower track.”
The regulator found reviews of the investment strategy for these legacy plans were typically not planned until late 2017 and into 2018.
For bespoke lifestyle arrangements set up by advisers, trustees and employers, the regulator found most life insurers viewed the responsibility to review bespoke lifestyle strategies as sitting with the third parties who set them up.
However in some instances, the FCA found life insurers are undertaking proactive modelling of bespoke lifestyling strategies to assess appropriateness for themselves.
The regulator found most life insurers have taken, or are planning to take, a proactive approach to communicating with both third parties and consumers about the need to review the appropriateness of bespoke strategies.
A spokesman for the FCA said: “We are concerned, however, that some firms claim they have little or no responsibility for such strategies and have no plans to proactively communicate with third parties, instead waiting to be contacted by them.”
Tom Barton, a pensions partner at international law firm Pinsent Masons, said existing lifestyle strategies therefore need some work to make sure the de-risking fits in with the likely retirement outcome.
He said: “Given that the retirement product market will continue to develop, even recently updated lifestyling strategies may need further work to keep pace with prevailing trends.
“We really should be looking at removing the regulatory arbitrage between insurance based schemes and those with trustees who, by comparison, can just get on and do the right thing for their members without worrying unduly about claims, complaints and regulatory intervention.”
The craze for full cash withdrawals seen in the first year of pension freedoms continued in the second year, figures from the Association of British Insurers published in April revealed.
In the second and third quarters of 2016 a total of £1.627bn was taken in full pension withdrawals.
If that were repeated in the following two quarters, it would bring the total value of full withdrawals to £3.254bn in the second year of pension freedoms.
That would be fractionally less than the first year (starting April 2015), which saw £3.3bn taken out in full cash withdrawals.
However, there were signs full cash withdrawals may be diminishing.
In the second quarter of 2016, £860m was withdrawn, while in the third quarter just £767m was withdrawn.
Average lump sum values also diminished. In the first year of pension freedoms they stood at £15,200.
By the second quarter of 2016 they had fallen to £14,300, and in the third quarter they were £13,900.
emma.hughes@ft.com
