• 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.
For the other three options, we expect that D2C providers will use multi-asset passive funds, with a lower risk-return profile for investors starting to make near-term withdrawals and a medium-term risk-return profile for investors starting to make medium-term withdrawals.
While 'relative risk' traditional multi-asset passive funds could be one option for D2C providers, we expect target date funds to have an important role to play in non-advised drawdown.
What does this mean for advisers?
While the policy is aimed at D2C providers, there have been consistent read-throughs for financial advisers from the outset.
Now that this is hard-coded into policy, we expect the forthcoming changes in the D2C market will create pressure on advisers in four different dimensions: comparison, cost, appropriateness and governance.
• Comparison: To evidence that the investment options they offer to customers in drawdown are of comparable appropriateness and value for money to that which can be obtained in the retirement pathways non-advised market. Indeed, there is talk that AS2 may result in the reintroduction of an RU64-style rule that makes comparisons to retirement pathway schemes mandatory, as with stakeholder.