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

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.

• Option four: I plan to take my money within the next five years.

There is no price cap for retirement pathways. However during the consultation, the regulator suggested that providers should be mindful of the fact that in auto-enrolment workplace pension schemes the total cost of investing (a term I define to be platform/admin cost, plus fund ongoing charges figure, plus fund transaction costs) is 0.75 per cent. This creates a fairly strong anchor within which D2C providers must operate.

Is that price cap achievable? Yes: for example if we estimate a platform fee for a D2C provider to be 0.3 per cent for an investor with £100,000 at retirement, this leaves 0.45 per cent budget for fund OCF plus transaction costs. 

The price anchor indirectly forces providers down the road of offering multi-asset funds that are constructed with low-cost index funds. And there is nothing wrong with that – after all it is the asset allocation that counts when it comes to delivering investment outcomes, not the type of fund.

What kind of funds align to the standardised objectives?

For investors expecting to purchase an annuity under one of the pathway options, we expect providers to offer funds that have similar asset exposures to what annuity providers hold to fund annuities. That way, when investors purchase an annuity, there is a change in how an investor receives a payout (life-long guaranteed in exchange for surrendered capital), but not a change in the asset mix used to fund that annuity. 

That way if annuity rates change, the assets the investor holds to purchase that annuity are the flip-side of the same coin.

In the workplace pension world, there are pre-retirement funds that are designed to mirror annuity providers’ annuity-matching portfolios. We expect similar funds for the retail market, and are ready to construct 'annuity conversion portfolios' should the demand arise. 

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