What advisers should know about the FCA's investment pathway rules

Furthermore, the new initiative provides advice firms with a golden opportunity to differentiate their service and demonstrate their true value to a key customer demographic.

Background

The government’s 2015 pension freedoms gave consumers more flexibility in how and when they can access their pension savings but also added another layer of considerations when it came to selecting pension investments.

The FCA’s concern is that many consumers could lose out on retirement income through poor decisions. A Zurich/YouGov study found that over 40 per cent of savers who went into drawdown to access their cash have left their remaining pot untouched.

The regulator’s own research paper found that 33 per cent of non-advised consumers are in cash, as well as 18 per cent of non-advised Sipp consumers.

The pathways do have some important implications for advice firms.

Consequently, the FCA has decided upon a ‘significant market intervention’ (their words) and is introducing the investment pathways initiative to ensure that anyone with a pension drawdown account has access to simple, good-value investments that broadly match their retirement income goals. 

Customers who enter drawdown or transfer to a drawdown account will initially be given the three options:

• choosing investment pathways
• choosing their own investments
• sticking with the investments they already have

If they choose the investment pathway route, pension companies will be required to offer customers four investment pathway options. These will not be tailored based on their personal circumstances, but rather designed around four very broad retirement income objectives:

1. I have no plans to touch my money in the next five years
2. I plan to use my money to set up a guaranteed income (annuity) within the next five years
3. I plan to start taking my money as a long-term income within the next five years
4. I plan to take out all my money within the next five years

Pension companies will then offer investors a single investment solution depending on which pathway they have chosen (based on the assumption that limiting choice will lead to maximum engagement).

A soft price cap of 75bps will almost always mean that they offer multi-asset funds constructed with low-cost index funds, perhaps with an emphasis on ‘target date’ funds.

Implications for advice firms

“So far, so uninteresting”, you may feel; safe in the knowledge that this is of little concern to you and your advised clients, snugly ensconced in personal recommendations and risk-aligned portfolios. 

Financial advisers should see this intervention as a real chance to demonstrate the value of advice to existing and prospective clients.