FCA rules could shrivel Sipp market

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".