Pension FreedomJul 12 2017

Five key points about FCA’s pension freedoms shake-up

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Five key points about FCA’s pension freedoms shake-up

The Financial Conduct Authority revealed a worrying trend towards entering drawdown without advice and who is likely to seek your help to figure out the best course of action post pension freedoms.

For those of you who can’t face ploughing through the FCA’s 122-page Retirement Outcomes Review: Interim report published today (12 July), here are the five things you must know about what it contains.

1) How people are using pension freedoms

The FCA found consumers have welcomed the pension freedoms with more than one million defined contribution (DC) pension pots accessed since the reforms. 

In most cases DC pots accessed were small (64 per cent were less than £30,000) compared with the value of the state pension (worth about £200,000). 

The pension freedoms were found to have changed the way consumers access their pots.

Accessing pots early has become ‘the new norm’ with 72 per cent of pots since pension freedoms accessed by consumers aged less than 65, most of whom have taken lump sums. 

More than half (53 per cent) of pots accessed have been fully withdrawn.

Nine out of 10 of these were smaller than £30,000 (60 per cent were less than £10,000) and 94 per cent of consumers making full withdrawals had other sources of retirement income in addition to the state pension.

The regulator said it does not therefore see this as evidence of people "squandering" their pension savings, though the watchdog does have concerns about why people are shifting savings out of pensions. 

Drawdown has become much more popular: twice as many pots are moving into drawdown than annuities.

Before the pension freedoms, more than 90 per cent of pots were used to buy annuities.

Providers were found to have developed tools to help consumers understand the changes and introduced simpler flexi-access drawdown products that consumers can buy without taking financial advice. 

2) Emerging problems with pension freedoms 

The FCA concluded the market is still developing and firms and consumers are continuing to adjust to the reforms. 

But five emerging issues were identified. More than half (52 per cent) of the fully withdrawn pots were not spent but were transferred into other savings or investments. According to the FCA some of this is due to mistrust of pensions. 

The regulator also revealed concerns that most consumers choose the "path of least resistance" and accept the drawdown option offered by their pension provider without shopping around. 

Many consumers were also found to buy drawdown without advice but the regulator concluded they may need further protection to manage their drawdown effectively. 

The proportion of drawdown bought without advice has risen from 5 per cent before the freedoms to 30 per cent now. 

The FCA also noted annuity providers are leaving the open annuity market, reducing choice for consumers shopping around in the open market. 

In July 2017 only seven providers still offered annuities on the open market, which the FCA acknowledged may weaken the effectiveness of competition over time. 

While there was much fanfare that providers would come up with new retirement income solutions when pension freedoms were first announced the FCA found product innovation has been limited to date. 

For example the FCA noted we have not seen products emerge for the mass market that combine flexibility with an element of guaranteed income. 

But the FCA found stakeholders have not identified significant regulatory barriers to innovation, and we recognise that innovation may pick up as DC pots grow in size and industry is given more time to develop propositions. 

3) Remedies the FCA is considering 

The regulator is looking at additional protections for consumers who buy drawdown without advice. 

The FCA is looking at allowing consumers to take some of their savings early without having to put the rest into a drawdown product.

It has proposed producing tools and services to help consumers make good choices, primarily by building on existing initiatives such as the free guidance provided by Pension Wise.

The FCA said: “Getting this right will require cooperation across the government, regulators, industry and consumer bodies as the measures we are proposing do not fall within the FCA’s remit alone and some of these issues sit outside our immediate powers.”

In respect of providers withdrawing from the open annuity market and innovation, the FCA has not proposed action at this time.

But the regulator said it would keep the annuity market under review.

4) Regulator acknowledges more information not needed

For a change, the regulator recognised the way to help consumers to understand their options and engage with decisions, in part to help re-build trust in pensions, is not to bombard them with more information. 

The FCA said: “We do not propose to introduce more information. Instead, we are seeking stakeholder views on how to make existing information more impactful and effective.”

At this stage, the FCA revealed it is considering reviewing the effectiveness of communications sent to consumers before and when they access their pension pots.

The watchdog also suggested a review of the effectiveness of measures that are currently being used to encourage consumers to make use of the free guidance available from Pension Wise, the Pensions Advisory Service and their successor body.

The FCA asked for suggestions on how to increase consumer awareness of enhanced annuities (following the findings of our thematic review of annuities) and proposed introducing further tools to aid consumer decision making, such as tools to help consumers compare different types of products (for example, annuities and drawdown).

The watchdog said it would continue to encourage innovation through ongoing initiatives such as the Advice Unit and Financial Advice Market Review, which it claimed “are helping to bring innovative and affordable advice tools/models for the mass market.

The Financial Advice Market Review was tasked with bringing advice back to the mass market but rather than introduce a long stop to reduce the cost of offering financial advice it opted to push robo-advice as the way to help the vast majority of people navigate pension freedoms.

The FCA also stated it would support the development of the Pensions Dashboard, which it claimed has the potential to help re-build trust in pensions by making it clearer to customers where and how much their pension savings are.

5) Use of advisers post pension freedoms

Between October 2015 and September 2016, sales to consumers who did not take advice accounted for 63 per cent (52,000) of annuity sales and 30 per cent of drawdown sales. 

While most consumers purchasing drawdown use the help of an adviser, the FCA found sales to consumers who do not take advice still account for a significant overall number of sales with 48,000 sales between October 2015 and September 2016. 

In addition, an increasing number of consumers are purchasing drawdown without advice as before pension freedoms only 5 per cent of drawdown products were purchased by these consumers.

Consumers with larger pots are more likely to seek advice than those with smaller pots.

On aggregate and across all product types, the proportion of consumers seeking advice exceeds the proportion of consumers not seeking advice at around £30,000 to £49,000.

In terms of what options advisers face, while there are more than 50 providers active in the retirement income market the FCA found these differed by target market and products offered. 

The regulator’s report revealed seven large insurers have made more than 50 per cent of sales since the pension freedoms. 

Consumers who do not seek advice are mostly served by around 20 providers, which include large and medium-sized insurers and some of the larger self-invested personal pension (Sipp) providers.

emma.hughes@ft.com