The FCA’s long-awaited investment pathways rules has come into force this month, and while the implications are greatest for providers and non-advised investors, advisers and their clients will not remain unaffected.
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.
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.
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:
- I have no plans to touch my money in the next five years
- I plan to use my money to set up a guaranteed income (annuity) within the next five years
- I plan to start taking my money as a long-term income within the next five years
- 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.
But the pathways do have some important implications for advice firms. Firstly, providers must offer these options to advised and non-advised customers alike, so your clients will be aware.
Secondly, and perhaps more importantly, the non-advised options with a 75bps anchor may well become a ‘standard’ against which regulated advice is compared and measured.
When advising clients on their drawdown investments, advisers should include consideration of pathway investments (similar to the RU64 rules when recommending a personal pension rather than a stakeholder pension).
By implication, this means that they will have to explain why their recommended investment is better than the pathway investment fund the client could have picked.