The Financial Conduct Authority is considering intervening in the pensions market to make it easier for customers to shop around for drawdown products.
The interim findings of its Retirement Outcomes Review, published today (12 July), revealed that, since the pension freedoms were introduced in 2015, over one million consumers have accessed their defined contribution pension pots.
More than half of the pots accessed were fully withdrawn. However, most consumers choose the 'path of least resistance', accepting drawdown from their current pension provider without shopping around.
The regulator stated a lack of drawdown comparison tools restricts consumers’ ability to shop around for those products.
It argued comparisons are difficult, especially on charges which are opaque and complex.
Drawdown with the most complex charging structures can have between nine and 16 different administration charges, while even the simplest have as many as three.
The FCA found that consumers with a £40,000 pot could be losing up to £73-£90 a year. This could amount to up to £1,460-£1,800 over 20 years, not taking in to account fund charges.
Meanwhile, there are no market-wide comparison tools are available to help customers find the information they need to shop around. This means there is less competitive pressure on providers, which could lead to “higher charges, lower quality products and less innovation over time”.
Before publishing its final findings, the FCA plans to do more work to investigate “whether this type of harm is materialising in the market.”
It wants to help people shop around by promoting drawdown comparison tools, and the use of a single cost summary metric which would compare the total cost of drawdown. These measures could be introduced either through industry initiatives or FCA rules or guidance, which would be subject to consultation and cost benefit analysis.
“Our research shows very low levels of shopping around and data from the Association of British Insurers (ABI) shows that 94 per cent of non-advised drawdown sales were made to existing customers.
"This suggests limited competitive pressure to offer good deals. We plan to investigate further whether consumers are getting good value when they move into drawdown without taking advice,” the report said.
The report also flags wider issues that need to be addressed, such as lack of awareness of options and mistrust in pensions overall.
The FCA is inviting responses from the industry by 15 September 2017, and plans to publish its final report in the first half of 2018.