In their individual responses to the FCA consultation, Improving outcomes in non-workplace pensions published in November, both Aegon and AJ Bell have criticised the regulator’s proposals.
Aegon does not think these should be called 'warnings' at all, but rather an 'alert', while AJ Bell suggested it should not be prescriptive, adding that this move would need to be implemented better.
In the proposals, the FCA said that personal pension providers should warn savers that are holding too much cash, and prompt them to consider investing in other assets to grow their pot as much as possible.
Steven Cameron, pensions director at Aegon, said that at a time of sharply rising inflation, it remains inevitable that holding cash over any longer time-period would lead to a loss of value in real terms.
Providers should have flexibility to create their own investment solutions.SelbyBut he explained that while Aegon support the FCA’s plans for firms to issue additional communications to customers who have more than 25 per cent of their funds in cash for six months or more, it can be relayed in a better manner.
“However, we believe these should be described as ‘alerts’ rather than warnings, setting out the risks of holding significant cash but balanced with an explanation of when cash holdings may serve a purpose and also that investing isn’t risk free,” he said.
“At times of heightened market volatility, there’s a risk a ‘warning’ prompts customers, particularly those without access to advice, to move from cash into investments just before a market fall. While it’s to be hoped any such losses will be short term, the pros and cons need to be set out in a balanced way.”
Cameron said that while the FCA has suggested that firms might be given the flexibility to defer communications if they believe it is ‘the wrong time’ to issue a warning, he does not see this as workable.
“It’s nigh on impossible to know where markets will move next and determine what is the ‘wrong time’,” he said.
“Deferring a communication for three months might benefit some customers if they then didn’t move out of cash before a market fall. But if markets actually rose, deferring investing could mean some customers lose out, leaving providers open to being judged with the benefit of hindsight.”
He argued that for the majority of pension savers, holding significant amounts in cash for any longer period is very unlikely to give the best customer outcome, but communications alerting them to this must be balanced.
Meanwhile, Tom Selby, head of retirement policy at AJ Bell, said while he agreed with the City watchdog’s intention, he raised concerns about the way in which the FCA would implement these cash warnings.
Selby said rather than being prescriptive around when and how providers should deliver cash warnings, the FCA should instead make excessive cash holdings a ‘Key Risk Indicator’ and then monitor providers by the number of customers who hold excessive cash.
“This approach would be measurable and allow firms to target warnings as appropriate to their customer profile,” he said.
A single default fund is not the optimal solution
As part of the FCA’s consultation, the City watchdog also proposed that personal pension providers should offer a default investment option to help the non-advised save for retirement.
This default option would have to be a “diversified basket of investments” and take account of climate change and other environmental, social and governance risks.
As the saver approaches retirement age, the pot would be moved into less risky investments so any market downturn would have less effect on their savings.
These new rules would be similar to the requirement already in place for auto-enrolment pensions to put workers into a default investment option.
Yet, while workplace pension savers are automatically placed into the default option if they do not make an active decision, this will not be the same for personal pension savers.
Instead they would have to actively accept the offer of the default option.
Discussing this aspect of the proposal, Selby said: “Having a default investment solution could therefore help improve outcomes but a single default fund which incorporates lifestyling is not the optimal solution.”
He argued that the danger of offering a single default is that people who might otherwise have engaged will simply opt for the easiest option.
“This could mean people end up investing in a sub-optimal fund for decades,” he said.
“You can get an idea of the impact this could have by comparing the long-term performance of the ABI Mixed Investment 40 to 85 per cent shares sector, containing older default funds, with the IA Global fund sector, the most popular sector with retail investors.
“Over the past decade £10,000 invested in the ABI sector would have delivered a fund worth £20,964 compared to £31,420 invested in the Global fund sector. Over 30 years £10,000 invested in the ABI sector would have returned £76,480 versus £101,990 in the Global fund sector.
“In short – the most popular sector for retail investors making an active choice significantly outperformed funds in a sector primarily containing investors not making an active choice.”
Selby said this is likely because default funds by their very nature have to be lower risk to take into account the varying needs of those who invest in them. This in turn means they often leave large numbers of people out of pocket.
“Instead, AJ Bell believes providers should have flexibility to create their own investment solutions designed for the types of non-advised customer that use their products,” Selby added.
“This would allow firms to offer a small range of risk-managed funds to better suit differing customers’ needs.”
The consultation, which closes today (February 18), came after the FCA found that some personal pension savers found it difficult to identify appropriate investments, or were leaving large amounts of their pension pot in cash.
sonia.rach@ft.com
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