At the end of June the FCA issued the final report stemming from its retirement outcomes review. It also issued a consultation paper on the proposed changes to its rules and guidance, and a research paper on the effectiveness of possible changes to wake-up packs.
The remedies within the report fall into three categories:
- protecting consumers from poor outcomes;
- improving consumers’ engagement with their retirement income decisions;
- promoting competition by making the cost of drawdown clearer and more comparable for consumers.
These three areas form the headline objectives of the review and final report. The proposals are borne out of significant research, which pulled out some very interesting issues with the drawdown market as it stands. But we do need to bear in mind that we have only had the pension freedoms for a relatively short period of time – certainly in comparison with the time people have been saving to access these benefits – so the market is still evolving.
It is clear from the research that drawdown is becoming a default, instead of the purchase of annuities that we have seen in the past. The report states: “Twice as many pots have been used for drawdown than to buy an annuity. A third (32 per cent) of these were accessed without advice, compared with 5 per cent before the freedoms.”
It is this lack of advice that will be causing concern. We know that drawdown requires greater engagement, which isn’t necessarily being seen alongside the shift to more complex retirement options. The path of least resistance still appears to be a big challenge that needs overcoming, and therefore this aspect features strongly in the FCA’s proposals. It isn’t just about choosing the right product, but making sure the investments chosen are fit for purpose – especially for those that have defaulted into cash or may do so in the future.
The first proposed remedy from the FCA is to prevent consumers being defaulted into cash. The regulator is considering introducing rules to stop cash being the default option for those that are at or near retirement. Consumers would need to make an active decision to move to cash. In addition, the FCA is pondering whether those who hold significant cash for a period of time need to be notified by their provider. These issues will not be formally consulted on until January 2019, allowing time for an exploratory discussion beforehand.
The watchdog is also considering mandating providers to offer default investment pathways for non-advised clients, to ensure they can still have access to drawdown but with more structure to facilitate good outcomes. Its suggestion is three different strategies, dependent on the consumer’s choice of the following:
- I want my money to provide an income in retirement;
- I want to take all my money over a short period of time; or
- I want to keep my money invested for a long period of time and may want to dip into it occasionally.
Default investment pathways were previously raised by the Work and Pensions Committee and then dismissed by the government, so we wait to see if what has been proposed here comes into force. These changes don’t currently apply to providers who only have advised clients, so they are more of a halfway house than the original committee proposals, but I feel they are still missing the point that drawdown needs active engagement. This just gives another default option that may not be appropriate.