The review was launched on the back of the pension freedoms to ascertain how the retirement income market was dealing with the more complex options that are now available to consumers. The final report was published in June 2018 alongside the first round of proposed changes, which have been set out, following consultation, in the policy statement PS19/1. They include:
- Changes to the timing and content of wake-up packs;
- Changes to annuity information prompts;
- Making the cost of drawdown products clearer and comparisons easier.
Wake-up packs
Wake-up packs have been sent to those approaching retirement for many years, principally to remind them about their pension and give them details of the options that are available in future. The trigger points for this pack were fairly limited; they would typically only be issued at the point when the client showed an interest in accessing funds or came close to their stated retirement date.
The policy statement has confirmed that these trigger points will be earlier and more frequent, to encourage clients to become more engaged with their retirement options. This means that providers will now additionally be required to send a wake-up pack to a client in the following circumstances:
- Within two months after the client reaches 50 years of age; and
- Four to 10 weeks before the client reaches 55 years of age; and
- At five-year intervals after the wake-up pack is sent until the client’s pension fund is fully crystallised;
- Unless the firm has given the client such a statement in the last 12 months.
The wake-up pack sent to 50-year-olds will be a smaller, cut-down version that only includes a single-page summary document and appropriate retirement-risk warnings. This is because in most cases the client will not be able to access their funds at this point in time, and there is no point in creating unnecessary confusion.
The document should only include the high-level key information about the policy. The inclusion of generic risk warnings for clients is another change, but again these should only account for a single page of A4 paper.
These changes should help clients plan their retirement better, assuming the packs don’t just get filed away. It will, however, mean more paperwork for providers to produce. We wait to see if this can really increase engagement and clarity with regards to retirement options.
Annuity information prompts
The annuity information prompt was initially introduced in March 2018. These prompts require providers to display annuity quotes in a certain way, and disclose if there is likely to be a better rate available on the open market. The FCA felt that more needed to be done with regards to enhanced annuity options in particular. Its thematic review showed that between 39 and 48 per cent of consumers who bought a standard annuity from their existing provider may have been eligible to buy an enhanced annuity.
The regulator therefore consulted on further changes to the prompts, and has now introduced the following:
l Companies are required to ask consumers who express an interest in buying an annuity questions to determine whether they are potentially eligible for an enhanced annuity.
l Firms must also use the enhanced annuity information, where relevant, to generate a market‑leading annuity quote.
l In light of the above, firms must amend information requirements in the annuity comparison template to remove reference to enhanced annuities.
These changes will come into force on November 1 2019. The amendments should give those accessing an annuity without advice the correct information to ensure they consider the option of an enhanced annuity. Those who are eligible for enhancements are those most likely to benefit from an annuity in the current climate due to the poor standard annuities rates. That said, annuities provide a secure income that some people will still want and need, whatever the options available under the pension freedoms.
Drawdown charges
There are already rules about the information that needs to be provided to clients who are accessing drawdown for the first time, but the FCA wants to ensure charges are clear and easy to understand. It has amended its rules, which come into force on April 6 2020, in an attempt to help clients understand.
The major change is that there now needs to be a summary page in the key features illustration. This page will include a monetary amount for the first year of charges, as the regulator believes it would be easier for the client to understand the ongoing cost of their choice to use drawdown if they can see the initial year’s cost in cash terms.
Although showing the amount in cash terms makes a certain amount of sense, there are many variables that could change these charges, so the client could end up paying more or less than the figure shown.
Changes have also been made to communication requirements to ensure the correct information is passed on at the right time, including for those who are accessing uncrystallised funds pension lump sums rather than just drawdown. These include instruction to review the decisions that have already been made as part of the process.
Consultation paper CP19/5
This consultation paper focuses on the need for execution-only drawdown clients to have access to portfolios that should meet their needs throughout the time they are accessing their funds – or not, as the case may be. These portfolios are called investment pathways and must be offered to those clients who move all or part of their pension savings into drawdown, or transfers funds already in drawdown into a new drawdown arrangement – unless they received advice on how to invest all or part of their drawdown fund following either of these transactions.
It is possible for a client that was initially advised to later be deemed non-advised. That is the case if they make investment decisions more than 12 months after their previous advice and transaction, or within 12 months should they fail to confirm that their circumstances haven’t changed.
Not all providers are required to provide these investment pathways: schemes that are deemed small schemes or unable to provide pathways themselves will have other options.
Small self-administered schemes, or others that have less than 500 clients entering non-advised drawdown, are able to refer their non-advised clients to either another provider’s pathway solution, or the single financial guidance body’s drawdown comparator tool (when operational). I can’t see either of these being a popular option, because they may result in business moving to another provider and will look a little strange to the client in the first place. As this is a consultation proposal I suspect there will be push back on this option.
Those that don’t want to or can’t offer pathway solutions, but don’t fall into the small-scheme category, will have to provide pathway solutions for at least two of the four client objectives described in Table 1. They will have to refer consumers to another provider’s pathway solutions for any objectives where they don’t provide one themselves.
Table 1: How the pathways will be determined
Option | Pathway |
One | I have no plans to touch my money in the next five years |
Two | I plan to use my money to set up a guaranteed income (annuity) within the next five years |
Three | I plan to start taking my money as a long-term income within the next five years |
Four | I plan to take out all my money within the next five years |
Source: SJP. Copyright: Money Management
Providers will only be able to offer a single pathway for each of these four objectives. Should a client not choose an objective, or fail to take up a pathway solution, the FCA says a provider should then either prompt the consumer to take advice or guidance, direct them to review the investment pathways again, or give them more information to help them make their investment decision.
The investment pathway consultation ends on April 6 2019, so there is sufficient time for those interested to have their say. I was surprised to see such a detailed consultation given the toing and froing on the need for these investment pathways.
But it is a good thing they are only required for non-advised clients, because those giving clients good investment advice doubtless wouldn’t be happy about having their toes stood on – by either the FCA or by providers forced to offer investment solutions to all clients.
Claire Trott is head of pensions strategy at St James’s Place Group
