FCA recommends investment pathways for drawdown

The watchdog's Retirement Outcomes Review also proposes the provision of single-page ‘wake-up’ packs when members turn 50, which will then be sent every five years until the saver’s pot is fully crystallised.

Freedom and choice in pensions has led to a boom in the number of savers accessing their pensions.

People like the idea of choice, but in reality they just want the illusion of choice

Simon Harrington, PIMFA

The FCA’s report found that 1.5m defined contribution pots were accessed between April 2015, when pension freedoms were introduced, and September 2017.

Seventy-two per cent of consumers who accessed their DC savings were younger than 65. Fifty-five per cent of pots accessed were fully withdrawn.

The review paints a picture of poorly informed drawdown customers. One in three consumers who had recently gone into drawdown were unaware where their money was invested, while others had only a broad idea.

Savers want to think they have choice

The paper calls on providers to design “three ready-made drawdown investment solutions (‘investment pathways’) within a simple choice architecture”.

The FCA will hope that these investment pathways will help consumers avoid lapsing into a long-term cash-heavy retirement strategy.

It observed that a number of providers are currently defaulting their customers into cash or ‘cash-like’ assets, with 33 per cent of non-advised drawdown consumers solely holding cash.

It estimated that over half of these “are likely to be losing out on income in retirement by holding cash”.

Tom Selby, senior analyst at platform provider AJ Bell, urged further clarity from the regulator over investment pathways for drawdown.

“We think there are potentially some practical hurdles that need to be overcome,” he said, including the point where savers enter a default solution, and the opt-out process.

“Our main concern is making sure that any intervention in that area doesn’t stop people using their pension freedoms,” he added.

The FCA’s concerns over cash are supported by research undertaken in 2017 by provider Royal London, which found that £1,000 placed into a deposit account 10 years previously would have been worth less than £900 a decade later.

By contrast, £1,000 put into a simple multi-asset fund would have been worth more than £1,500 10 years later.

Simon Harrington, senior public policy adviser at the Personal Investment Management & Financial Advice Association, described the proposal as “an elegant way” of reconciling the reality that savers “need a nudge” and encouraging choice.

“People like the idea of choice, but in reality they just want the illusion of choice,” he said.

“So if you provide them with three pathways, a low-risk pathway, a medium-risk pathway and a high-risk pathway, my hunch is that the majority of people will probably go the middle way, and that should be fine,” he added.

Where is the charge cap?

The FCA has surprised some by stopping short of introducing a charge cap for drawdown investment pathways.

It called upon providers to “challenge themselves on the level of charges and use 0.75 per cent on default arrangements in accumulation as a point of reference”.

The option of capping charges “remains open”, it says. Chris Noon, partner and chair of the board at consultancy Hymans Robertson, recognised the difficulties of introducing a cap, but was nevertheless disappointed at its exclusion.

He estimated that the average advised drawdown price stands at around 2.3 per cent a year. “That is just a scandalous amount of money that is being taken out of these pots,” he said.

At present, “people have got quite random investment solutions,” he added, and “when there is a default pathway in place it’s a bit easier” to limit charges, he conceded.

But Ian Browne, pensions expert at provider Old Mutual Wealth, said that a charge cap could inhibit the development of investment pathways.

Savers facing a range of investment risks will likely need “an active management solution rather than a passive management solution, so that will probably mean that the costs involved could be slightly higher than a charge cap of 75 bps”, he said.

Frank Field, chair of the Work and Pensions Committee, expressed his frustration at the FCA’s failure to introduce a cap.

Field said: “Yet again, the FCA has found that people are being ripped off by unjustifiably high and complex charges.”

“But the FCA wants another year to mull over a charge cap while life savings are shamelessly milked. There has been more than enough warning. They should just introduce it,” he added.

More than four months to plan for retirement

Wake-up packs are usually provided to consumers four to six months before their intended retirement date, or if the consumer asks for a retirement quotation more than four months before retirement date.

Tom McPhail, Hargreaves Lansdown’s head of retirement policy, welcomed the proposed mandatory provision of retirement material to savers years before they intend to retire.

He urged providers to “strip the wake-up packs down to really simple pointers”, adding that “people wouldn’t read the wake-up packs as they were”.

The consultation details trials of a number of sign-posts for members that were intended to encourage greater use of guidance from government advisory unit Pension Wise.

These included a “prominent cover signpost to Pension Wise as part of the covering letter of the ‘wake-up’ pack”, and “a separate A4 sheet which included information about Pension Wise and space to record booking information if they book an appointment”.

Neither experiment had a “statistically significant impact on the use of Pension Wise, switching to a new pension provider or consumers contacting their pension provider for more information,” the report reads.

Government has 'passed buck' to FCA

Plans for improved guidance and simpler communication with drawdown users have been broadly welcomed by experts. The consultation noted that “products can have as many as 44 charges linked to them”.

The FCA has recommended that improved disclosure from providers could include “a reminder of the consumer’s chosen investment pathway and their ability to switch investment pathways and/or products”.

Alistair McQueen, head of savings and retirement at pension provider Aviva, was pleased that the FCA had not set out to find pension freedoms “guilty before innocent”, but cautioned against the FCA being “too prescriptive” in its guidelines on communication.

“The choices are so much greater to customers now from age of 55 onwards. We as providers have a responsibility to help customers consider them and wake customers up earlier to these considerations that are coming over the horizon,” he said.

In January, the government removed an amendment to the financial guidance and claims bill that would have auto-enrolled people into guidance as they sought access to their pots or transfer benefits.

Stephen Lowe, group communications director at specialist financial services company Just Group, welcomed the report, but called for greater urgency from the regulator to design rules encouraging guidance.

“There seems to be no urgency to close out on this very, very important decision that’s effectively been passed over from the government to the poor old FCA to sort out,” he said.

This will prove especially difficult given that the regulator will have to consult with the single financial guidance body on the issue, he said, which does not yet exist.

“It can’t take another three years though,” he added. “We’ve got a million people each year hitting age 55, and all of them need to be protected and not just left alone.”

“My suggestion to the FCA is just go intuitively with what you think, and then refine it.”