The Financial Conduct Authority plans to introduce four default investment pathways in proposed changes to its pension rules to help non-advised drawdown consumers.
In a 116-page consultation paper published on its website today (January 28), the regulator announced plans to help the estimated 100,000 customers that enter drawdown without taking advice each year.
As part of its Retirement Outcome Review, the FCA found many consumers were solely focused on taking tax-free cash from their pensions and were "insufficiently engaged" with the decision around how to invest the remaining funds that moved into drawdown.
Christopher Woolard, executive director of strategy and competition at the FCA, said while the pension freedoms give consumers more flexibility in how and when they can access their pension savings, they are also faced with more complicated choices.
He said: "Our Retirement Outcomes Review identified that many consumers are focused only on taking their tax-free cash and take the ‘path of least resistance’ when entering drawdown.
"This can often mean that the rest of their drawndown pension pot is not invested in a way that meets their needs and intentions.
"We found that around one in three consumers who have gone into drawdown recently are unaware of where their money is being invested. This leads to poor consumer outcomes."
In response, the regulator has proposed pension providers offer non-advised customers a choice of four investment pathways to best meet their retirement objectives.
The FCA stated it recognised some stakeholders had voiced a preference of a single, default investment pathway as the most appropriate method of intervention, but disagreed it offered the best solution and risked reinforcing a lack of consumer engagement.
The four objectives proposed by the FCA offered options to consumers who have no plans to touch their money in the next five years and those consumers who plan to use their money to set up a guaranteed income within the next five years.
The regulator also offered options to consumers who plan to start taking money as a long-term income within the next five years and those who plan to take out all their money within the next five years.
The FCA stated its rules do not prevent providers from offering an investment solution for consumers who fail to engage with their investment decision, as it does not consider itself to be “best placed” to set the “parameters” of that investment solution.
The regulator said: "Providers are better able to understand the needs of their unengaged consumers.
"We only propose to introduce one requirement on the ‘parameters’ of this solution.
"This is that, if the consumer is to move into the investment solution without making an active decision, it cannot be wholly or predominantly in cash, unless there is an existing contractual provision or scheme rule in place that provides for this."
Mr Woolard said: "Our proposals on investment pathways will help non-advised drawdown consumers select from four relatively simple choices, designed to meet their broad retirement objectives so that they can maximise their income in retirement."
The FCA estimates these changes could benefit people by up to £25 million a year.
Steven Cameron, pensions director at Aegon, said while improvements to retiree communications are welcome, there is no substitute for advice.
He said: "There are real risks that those not seeking advice will invest in a fund which is inappropriate for their retirement objectives.
"Asking customers entering drawdown to pick from one of four statements around their intentions for the next five years and then setting out a broadly suitable ‘investment pathway’ will be of help to some and will reduce the number defaulting into cash.
"But the pension freedoms by their very nature mean individuals have a highly personalised retirement journey."
Mr Cameron said it is crucial customers are not given the false impression that improved communications or simplified investment pathways replace the benefits of advice.
He said: "It is only with professional advice that an individual’s personal circumstances will be fully explored to optimise retirement decisions.
"For many, it will hugely beneficial to seek advice on when to retire, where to invest, how much to withdraw taking into account life expectancy and steps to take to avoid paying extra income tax unnecessarily."
William Burrows, retirement director at Better Retirement, said: "Non-advised decisions may result in OK outcomes when there are simple product choices such as annuities but non-advised drawdown involves making some complex investment decisions.
"Clearly a default investment pathway is better than nothing at all. In theory this sounds sensible but in practice there are lots of moving parts and a well thought out default can quickly run into trouble if market conditions change."
Mr Burrows said he would prefer the industry to approach the problem of unsuitable drawdown plans by looking to make advice more widely available, especially by exploring ways of reducing advice costs.
He said: "The elephant in the room is the cost of advice. If price equals cost plus value added, the value added by good advice is probably higher than the potential savings by not taking advice."
rachel.addison@ft.com
