In its much anticipated review into the non-advised drawdown market, published this morning (28 March), the regulator found some providers have not been fully complying with its requirements in dealings with pension customers, putting retirees at risk of making decisions not in their best interests.
Providers' failings included not giving an open market options statement (OMO) to customers - which flags they could get a better deal with a different provider - in good time before selling them a pensions decumulation product.
Though the regulator did state the information was generally pointed out elsewhere including pre-sale telephone calls.
Some firms sold drawdown contracts and variations online or over the phone but did not send a hard copy of the relevant product information at the right time.
"This creates some risk of customers not understanding the consequence of entering into drawdown or moving from capped to flexi access drawdown," the FCA paper stated.
Weaknesses in the way pension providers detail their charges were also found by the FCA.
For customers who had taken their pension commencement lump sum (PCLS) but no immediate income and for those accessing drawdown by a variation of their contract, some providers did not provide "comprehensive information" about charges and investment returns
"This means customers could not review their drawdown decision and determine whether it still meets their needs," the regulator stated.
Where customers accessed drawdown by a variation of their contract, some providers only gave details of charges at the start of the contract and not those ongoing.
Despite the failings, the 10-page report, part of the FCA's ongoing review into the impact of pension freedoms rules which came into force three years ago giving retirees the right to do as they wish with their nest eggs, the regulator found providers were broadly meeting their requirement to communicate “in a clear, fair and not misleading way” with their drawdown customers.
But some consumers were still not “fully engaged" with the process, making decisions without considering all the options and so "putting themselves at risk of harm,” the FCA stated.
In particular some are failing to consider the investment choices of drawdown, the FCA found.
Those accessing benefits early appear to have already made the decision to enter drawdown with their own provider, meaning they are less open to shopping around, it added.
For the cohort not giving thought to investment choices, particularly those purely looking to access their PCLS, some have remained in low-risk assets due to lifestyling strategies.
Others have stayed in cash funds due to the need to enter a new contract to access drawdown.
Both of these “increase the risk of customers running out of money in retirement, or having less money than they were expecting,” the FCA warned.
Steve Webb, pension minister at the time pension freedoms were introduced and now director of policy at Royal London, said the FCA’s research "reinforces the value of taking financial advice when making key at-retirement decisions".
Mr Webb also suggested the FCA should review whether people should be able to access tax free cash and leave the rest invested, to ensure they do not lose out on future investment growth.
“We also need to make sure that people get wake-up packs and other information much sooner, rather than after they have made up their minds,” Mr Webb concluded.
