There needs to be a charge cap on decumulation products including investment pathways, as costs can vary across similar products, according to the People’s Pension.
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.
In its response to the Financial Conduct Authority’s consultation (published in January) the People’s Pension called for a costs cap to enable clients to have a clear understanding of charges.
The provider stated: "Over time we believe that the method for calculating transaction costs should be harmonised between accumulation and decumulation such that consumers have a clear and comparable idea of costs and charges."
The not-for-profit master trust provider said the problem was that in the absence of a cap providers are able to charge what they like, which has led to some products being more expensive than others despite offering a similar service.
Since 2015 providers have had to cap the charges within default accumulation funds to 0.75 per cent per year of funds under management however there is no such cap for decumulation products.
Gregg McClymont, director of policy and external affairs at the People’s Pension, said: "The Retirement Outcomes Review uncovered a wide range of charges for drawdown from between 0.4 per cent to 1.6 per cent for substantially the same product.
"We don’t think competition will bring down charges for drawdown and note that policy action, not increased competition, did the job in accumulation."
The investment pathways will be overseen by Independent Governance Committees (IGCs) however, the People’s Pension has claimed that "IGCs are not a substitute for a trustee".
The People’s Pension stated: "Trustees in a modern master trust occupy a role similar to company directors in a limited company.
"The same is not true of IGCs whose role is advisory and much weaker as a result."
Scottish Widows has also stated that IGCs should not be in charge of overseeing investment pathways, as their members aren’t responsible for the product performance.
Peter Glancy, head of policy, pensions and investments at Scottish Widows, told FTAdviser that these committees were well placed to make value for money assessments, but the provider doesn’t believe they have the appropriate expertise to oversee the design and performance of the investment proposition, including pathways.
Another problem raised by People’s Pension was that many retirees are not equipped to make complex investment choices and although the investment pathways will help, further reform is still needed it said.
Mr McClymont said: "One of the main challenges with decumulation is trying to manage longevity risk.
"We think that, in practice, getting people to self-manage the rate at which they take income from their pot will prove very challenging. It’s already very hard for well-advised people who are highly financially literate to get this right.
"We think there’s a role for a trustee in indicating what a sustainable level of income from a pot might be."
The People’s Pension also stated that the idea behind investment pathways could be used more generally to present retirement choices in a structured manner.
It told the FCA: "While the freedom element of the pensions freedoms is welcome, the choices now required are hard and the risks substantially greater than those involved in annuity purchase.
"Common sense, as well as the initial behaviours evidenced in the post pensions freedoms market, indicate specifying some elements of a product may be the best or only way to mitigate particular risks."
As part of its retirement outcomes review the FCA proposed four pathways 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 pathways include an option for consumers who have no plans to touch their money in the next five years and for those who plan to use their money to set up a guaranteed income within the next five years.
The FCA is planning to publish its final rules on this topic by the end of July 2019.
amy.austin@ft.com
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