Four years on from the introduction of pension freedoms, the Financial Conduct Authority says that up to 100,000 consumers drawing benefits are losing out on potential pension income.
Most exposed are those who enter the retirement arena without taking advice.
So, are the FCA’s proposed ‘investment pathways’ the solution to this issue?
Cash is king
According to FCA figures, up to 60 per cent of people in income drawdown are merely accessing their tax-free lump sum option.
Not only are they not taking any income, the consideration as to what investment plan will give them the best chance of future retirement success appears, all too often, to be ignored.
In addition, it has been common practice for providers to default drawdown customers into a cash fund – to the extent that a third of non-advised drawdown customers are wholly holding cash.
With growing concerns over these issues, the FCA has now proposed – in Consultation Paper 19/5 – the creation of investment pathways.
These are a proposed mandatory set of investment options offered to non-advised customers by pension providers to help ensure they invest appropriately for their income and/or lump sum requirements.
As part of its research for Consultation Paper 19/5, the FCA asked consumers what they need from their pension – a quarter chose more than one option, suggesting they would need more than one ‘type’ of income in retirement.
While helping consumers navigate the complexities of retirement planning is to be welcomed, there are several hurdles that these pathway solutions would have to overcome to ensure they help provide better customer outcomes.
The proposals suggest four different pathways that broadly allow for members who have the following objectives over the next five years:
- Doing nothing and remaining wholly invested;
- Drawing guaranteed income (for example, annuity);
- Drawing non-guaranteed income (for example, income drawdown); or
- Fully encashing all funds.
There will be no obligation on providers to provide pathway funds if they have fewer than 500 non-advised customers entering drawdown a year.
However, such providers – typically ‘full’ self-invested personal pension operators – then have a decision to make as to whether they signpost clients to the single financial guidance body drawdown comparison tool or to another provider’s pathways solutions.
Those providers not exempt under the 500-member limit will have to provide pathways solutions for at least two of the four objectives. For any they choose not to provide, they will need to refer consumers to another provider’s pathway solutions (and the SFGB option will not apply here).
It is not entirely clear how providers who do not create their own pathways solutions will select their referral partner.
And the prospect of the providers who do not offer their own pathways – especially those that fall into the ‘small’ category – potentially being forced to open up their client bank to attack from a ‘full’ pathway solutions provider does not sit particularly comfortably.
It also seems strange that, despite the majority of respondents to the FCA’s CP 18/17 seeking the option to provide more than one option per pathway (for example, offering risk-rated options), the FCA has stuck to their guns for now and proposed only one fund per pathway can be offered.