Pimfa warns against pension pathways

Pimfa warns against pension pathways

The Financial Conduct Authority is in danger of reinventing the annuities market that existed prior to pension freedoms with its proposed investment pathways, the Personal Investment Management & Financial Advice Association has warned.

In its response to the regulator’s consultation on this topic, which closed on April 5, the adviser trade body stated it is concerned that the remedies could, in effect, disincentivise people to engage with their pensions.

Simon Harrington, senior policy adviser at Pimfa, said with the introduction of investment pathways, many of the consumer behaviours which the FCA has previously "sought to eradicate" from the retirement market "will be repeated".

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Prior to the introduction of the pension freedom reforms, which removed restrictions on defined contribution pension schemes for those over the age of 55, savers were forced to either purchase an annuity, draw down an income, or face a 55 per cent tax charge on withdrawals. 

Under the new rules people can draw down 25 per cent of their pot tax free which has led to many focusing solely on taking the tax-free cash and meant they were "insufficiently engaged" with deciding how to invest the rest of the funds.

As part of its latest work on retirement the FCA proposed pension providers offer their non-advised customers a choice of investment pathways to meet their retirement objectives.

But Mr Harrington said: "In this construct, investment pathways will become the de facto path of least resistance and providers of personal pensions and decumulation pathways will become cradle to grave providers.

"We have already seen in the initial work of this market study that consumers are more likely to remain with their incumbent provider if they make a non-advised selection."

Mr Harrington said introducing these default solutions for drawdown "will only ever create outcomes for consumers which are good enough", not the best they can be.

This is due to two factors, he noted.

First, it was unrealistic to expect mass produced products to serve potentially millions of customers can produce outcomes which are similar to tailored, bespoke products.

Second, Pimfa understands these products are focused on "high level strategy aligned to what a consumer thinks they want from retirement rather than how they will get it," for example their personal risk tolerance.

Mr Harrington also warned it was imperative that the new rules don’t create two different retirement markets – one for advised customers who benefit from choice and one for non-advised clients in which people follow pathways without due regard for the options available to them.

He said: "Doing so will both restrict the availability of choice, but also disincentivise product providers to drive innovation in the retirement market – something which has been largely lacking since the introduction of pension freedoms.

"In our view, it should not be the case that an individual could reasonably spend their entire life without having to engage with their pension and retirement options.

"These remedies, allied to the government’s automatic enrolment policy – a policy we fully support – enable this to be the case."