Retirement Income  

What the FCA's rules on investment pathways mean for clients

  • Identify key points in FCA retirement outcomes review paper
  • Explain what the standardised objectives are
  • Explain what the implications are for advisers
What the FCA's rules on investment pathways mean for clients
Chris Ratcliffe / Bloomberg

The conclusion of the Retirement Outcomes Review for non-advised customers is set out in the regulator’s Policy Statement PS19/21.

The key change is the introduction of mandatory, highly governed investment pathways for non-advised drawdown (we prefer the term 'retirement pathways', for clarity) from February 2021.

In a nutshell, retirement pathways is the new stakeholder, but for decumulation, and with a soft price cap of 0.75 per cent instead of 1.5 per cent.

While the policy changes impact non-advised providers, a 'Dear CEO' letter was sent to financial advisers in January this year announcing a review of the market for pensions and investment advice (Assessing Suitability Review 2) with particular reference to retirement outcomes.

What are the key points of PS19/21?

The policy means that:

  • Direct-to-consumer providers must offer retirement pathways to their customers;
  • Platforms that are both advisory and direct-to-consumer must offer retirement pathways to both their advised and non-advised customers; and
  • Advisers need to consider retirement pathways when assessing suitability for their clients considering drawdown.

Retirement pathways will fundamentally change the landscape for retirement investing, so it is worthwhile for advisers to ensure they are in the loop.

What is the point of this policy intervention?

The purpose of this policy intervention is to deliver better retirement outcomes for non-advised investors, who may not have the confidence to make robust and informed investment decisions.

Key points

  • Mandatory introduction of investment pathways takes effect from February 2021
  • Platforms must offer it to advised and non-advised customers
  • Advisers will also need to consider investment pathways

Key protections include, but are not limited to: ensuring cash is not a default option; ensuring costs and charges are clear, reasonable and regularly communicated; ensuring investment strategies are appropriate through the introduction of default options for different objectives; and ensuring there is third-party oversight of those default investment options either through an independent governance committee or a third-party governance advisory arrangement.

If you are thinking that sounds a bit like the governance arrangements around auto-enrolment workplace pension schemes, you are right. If you are also thinking it would have made sense to have those guidelines in place before or in conjunction with pension freedoms in 2015, you are also right.

What will D2C drawdown look like?

In the policy statement PS19/21, the regulator is requiring all D2C providers to offer mandatory investment pathways (retirement pathways) with effect from February 1 2021. 

Retirement pathways mean offering non-advised transaction or customers going into drawdown four investment options that align to four standardised objectives formulated by the regulator.

Providers must offer a single investment solution (a single fund, or a single fund from a suite of funds from the same solution such as target date funds) for each pathway. These funds will be subject to intense scrutiny by the provider's investment governance committee in terms of appropriateness and value for money.

What are the standardised objectives?

The standardised objectives are intended to align to specific actions or intended actions that non-advisers may want to take.

The final wording for each standardised objective is below:

• Option one: I have no plans to touch my money in the next five years.

• Option two: I plan to set up a guaranteed income (annuity) within the next five years.

• Option three: I plan to start taking a long-term income within the next five years.