PensionsJan 19 2022

Surprise as savers leave drawdown investment pathway

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Surprise as savers leave drawdown investment pathway

Scottish Widows has said it has been surprised by the number of savers who have chosen to ignore investment pathways and go it alone.

Investment pathways were introduced in February 2021 to reduce the number of savers in drawdown making unwise investment choices, such as taking on too much or too little risk.

The pensions industry has been monitoring how savers have been using investment pathways since they launched in February.

Peter Glancy, head of policy for pensions and investments at Scottish Widows said one surprise had been the number of people choosing to make an active investment selection rather than use one of the pathways.

Glancy said this was something the company would need to keep a close eye on to see how it was working out.

Peter Glancy, head of pensions policy at Scottish Widows

The Financial Conduct Authority introduced four pathways after it found many savers were focusing solely on taking tax-free cash from their pensions and were "insufficiently engaged" with how to invest their pension once they moved into drawdown.

But a report by the Association of British Insurers in June found that while 5,390 consumers chose to stick with the investment pathways option, some 1,408 chose to self-select instead.

Glancy said it was likely some of these people who opted to deviate from the pathways would have received advice but he was pleased people were now not choosing to leave money in cash.

“At Scottish Widows we are collating data on all of the investment decisions being made by customers and just now we are pleased that customers are making conscious investment decisions which don’t involve leaving money in cash at a time of increasing inflation,” Glancy said.

Investment pathways build on the concept of the governed investment options used as defaults in auto-enrolment schemes. 

It means requiring people to think about their retirement journey and matching a governed investment solution aligned to the way their pension pot will be used during their retirement.  

Glancy said: “The investment pathway conversations get customers to think about the sort of retirement journey that they will go on and the role that their pension pots will play in that journey including the timing. 

“The key thing is that people are giving this real thought and then making a conscious decision, which is great.”

He said it would be concerning if savers were using their pension pots to undertake ‘day trading’ but there was no evidence of this so far.

Glancy added: “We need to recognise the high cost of advice which means that sort of support is not always appropriate for very small pots, and at present the vast majority of pots in defined contribution are quite typically less than £20,000. 

“We continue to call for a middle ground between guidance and advice, which will allow those with smaller pots to gain access to professional support at a relatively low cost.

"In practice, this could be done by offering a more restricted service on simple and tightly regulated products, with advisers able to answer specific questions from policyholders without the need for a full end to end analysis of people’s financial status and background."

The FCA has proposed rolling out investment pathways for Isas, as well as pensions.

Sarah Pritchard, the FCA's executive director for markets, said in a speech at the annual Pensions and Lifetime Savings Association Annual conference in October that the regulator had reason to believe the pathways were working for pensions and was looking at whether a similar structure could work for Isas

At the time, she said: “Although it is early days, initial data from a survey by [the] Association of British Insurers suggests that 40 per cent of those who use investment products are taking up the pathway investment solutions offered.

"We will be doing a post implementation review after 1 year, i.e after Feb next year, and will be looking to see whether this choice architecture/guidance has improved outcomes for consumers.

"If it has then this framework could be used in other situations. Our Consumer Investment strategy talks, for example, about introducing a similar guided sales wrapper for stocks and shares Isas."

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