The number of self-invested personal pension providers catering for non-advised clients could shrink due to new rules being considered by the Financial Conduct Authority.
As part of its Retirement Outcomes Review, the FCA proposed pension providers offered their non-advised customers a choice of investment pathways to meet their retirement objectives.
This was after it found many consumers were solely focused on taking tax-free cash from their pensions and were "insufficiently engaged" with deciding how to invest funds that moved into drawdown.
The new rules will also apply to Sipp providers which have more than 500 non-advised clients going into drawdown each year, which means some operators, more focused on advised consumers, could end up withdrawing their services from the market as it would prove too expensive to introduce these pathways.
Jessica List, pension technical manager at Curtis Banks, told FTAdviser the regulator's research identified the pathways solution "may not be suitable or necessary for Sipp operators who focus primarily on advised clients and so-called 'sophisticated' investors".
She said: "However, the proposed easement is based purely on the number of non-advised clients an operator has per year.
"This could mean that a very small direct-to-consumer operator could be exempt, or that a very large operator focusing on advised clients would still be caught.
"Although the research shows that the majority of these adviser-focused operators would currently qualify for the easement, the Sipp market is continuing to grow and consolidation activity is still taking place.
"Therefore, it will be important for the FCA to monitor this easement on an ongoing basis to make sure that its terms capture the intended operators."
According to research from the regulator published in the Retirement Outcomes Review consultation paper, 18 per cent of Sipp providers said they would implement investment pathways, including the largest operators by number of non-advised consumers.
Some 39 per cent said they would rather restrict their drawdown offering to advised consumers only, with the remaining 42 per cent being unsure.
However, the 18 per cent who said they would implement investment pathways have 76 per cent of the non-advised Sipp plans that went into drawdown last year, the FCA stated.
AJ Bell and Hargreaves Lansdown have confirmed to FTAdviser they intend to introduce these pathways.
Ms List said: "The vast majority of non-advised consumers should be with operators who will either offer investment pathways or qualify for the easement.
"However, there may still be operators who decide to restrict drawdown to their advised customers only, and those individuals will have to choose between taking advice or transferring to a new provider in order to access their pension benefits."
Ms List argued the impact for financial advisers could be mixed.
She said: "On one hand, the pathways solution may draw attention to the importance of investment decisions while in drawdown and encourage more people to seek advice.
"On the other hand, some people who may have otherwise considered taking advice could decide not to, feeling that they've done enough by choosing a pathway."
Ricky Chan, director and chartered financial planner at IFS Wealth & Pensions, said that he generally agrees that the market servicing non-advised drawdown clients could shrink slightly as it wouldn’t be commercially viable for some providers, whose main focus is in the advised market, to invest resources in suitable investment pathways for a small part of their business.
He said: "But I’d imagine that they’d still need these investment pathways available for any orphan clients approaching retirement.
"As with insured personal pensions providers, we already see many offering 'Lifestyling funds targeting drawdown', so I suspect that the investment pathway solutions offered would be based on a similar approach, but clearly this requires investing resources to develop, and have ongoing governance/monitoring over them.
"It also highlights the importance of clients seeking professional advice before going into drawdown so that they’re informed about the risks involved, the importance of reviewing funds, and that it isn’t just a one-off decision. For all its advantages, I think that one of the downside of default funds/investment pathways is that it removes the responsibility away from the consumer and may lure them into a false sense of security."
Gareth James, head of technical at AJ Bell, argued that ensuring savers are appropriately engaged with the investment options available to them, not just the retirement choices, when they enter drawdown is something everyone should aim for.
However, introducing investment pathways in the Sipp market comes with multiple challenges, he told FTAdviser.
He said: "Only offering one pathway investment for each of the four retirement options that individuals will be able to select feels like a least worst option.
"Multiple choice is likely to cause confusion and reduce engagement, but a single investment option isn't going to cater for the wide range of risk appetites of investors making a particular retirement choice.
"There is also a risk savers will think their provider is recommending the pathway investment option to them, which could create problems down the line if they consider that the investment wasn't suitable for them."
A spokesperson at Hargreaves Lansdown also expressed concerns.
He said: "The risk of an investment pathway is that it might over simplify the process and not provide guidance on how much income to draw.
"The biggest risk is that people draw too much and then their income falls at a later time in their life when their fund has little or no opportunity to recover."
AJ Bell's Mr James argued the FCA's proposals appear "to have been written with the insured pension market in mind, as they require both allocation of investments to either a drawdown or non-drawdown pot, and automatic disinvestment for payments out of the scheme to work efficiently".
Investment allocation of that type and automatic disinvestment are not used in much of the Sipp market, he said, "so the proposals potentially create a need for operators to make fundamental changes to the way their Sipps work".
He added: "Where their customers have been used to them working in a particular way for over 20 years, a fundamental change of this type is going to create confusion."
The FCA declined to comment on this matter. The consultation on this matter closes in April.
maria.espadinha@ft.com
