Providers and advisers have broadly welcomed the regulator’s latest post-pensions freedom market study but warned establishing prescribed drawdown investment pathways will never be more than a “blunt tool”.
The Financial Conduct Authority (FCA) released the final report from its Retirement Outcomes Review alongside a consultation paper looking at whether to introduce set drawdown investment pathways to give non-advised consumers a chance at better outcomes.
Other suggestions put forward to protect consumers in the post-pension freedom world included wake-up packs from age 50, with regular provider contact every five years and giving drawdown retirees clearer information on charges, set out in pounds and pence, to remove complexity.
‘Blunt tool’
Nucleus product technical manager Rachel Vahey warned introducing set drawdown investment pathways could be problematic.
“Setting the right investment strategy to match someone’s goals and aspirations in drawdown is vitally important. While we recognise what the FCA is trying to achieve by asking providers to develop investment pathways we warn this can never be more than a blunt tool.”
She added: “Multiple different pathways are needed to reflect the various ways people want to use their drawdown pot and their own personal circumstances. We believe the better answer is helping people access advice and guidance to make an investment decision personalised for them.
“It is important that any requirement to offer default investment pathways is appropriately set and should only be offered to the non-advised entering drawdown. Those who receive regulated advice already receive this help setting an investment strategy.”
Vahey also commented on findings which showed many non-advised drawdown retirees are missing out on investment returns as their pots sit in cash.
“We agree with the FCA about the importance of making an active investment decision, however, it should draw up the rules about cash default carefully” she warned. “Pension scheme members may be defaulted into a cash fund on entering drawdown before a decision is made.
“This can be a useful way of holding the funds for a short while before actively deciding on an investment strategy, and this should be allowed, as long as the individual does not remain in cash too long.”
AJ Bell senior analyst Tom Selby said the FCA had been under pressure to act on drawdown default options.
“We are pleased the FCA hasn’t jumped in with both feet in this regard and will instead consult on the idea of introducing default investment pathways.
“This is absolutely the right approach because default investment pathways that are not a personal recommendation would be a very significant development and needs careful consideration,” he said.
“Different people have very different personal circumstances and so there needs to be full consideration given to how investment pathways will be implemented and monitored over time.
“Successful navigation of drawdown requires engagement and care needs to be taken that creating blanket defaults doesn’t simply hard-wiring inertia into the system.”
‘Missed opportunity’
PIMFA senior policy adviser Simon Harrington said the report stuck the right balance between protecting vulnerable consumers and encouraging people to make the most of pension freedom.
He added: “‘The introduction of multiple investment pathways hopefully overseen by strong, independent governance in a restricted choice architecture framework is a particularly welcome recommendation which should encourage consumers to fully understand their retirement options without fear of making the wrong decision.
“We believe this is a logical solution to the disconnect between the principles of freedom and choice and automatic enrolment respectively.”
However, he also said advice would always be the better option. “We believe that the move to send out wake up packs at 50 will help engage individuals sooner, but believe that within them the advice allowance should be flagged alongside a requirement for providers to offer it. This is a missed opportunity that we are urging the regulator to reconsider,” said Harrington.
National IFA firm LEBC backed earlier and more frequent wake-up packs and annual statements for drawdown clients.
However, director of public policy Kay Ingram said: “We fear that over-reliance on providers to engage consumers could perpetuate the problem of consumers not shopping around and simply accepting the line of least resistance.
“Decisions around retirement planning are amongst the most important life impacting decisions anyone makes. We believe the answer is to improve access to affordable advice which takes each individual’s circumstances into account. Successful retirement planning focuses on the consumer’s needs now and in the future and not on products.”
Ingram added more emphasis should be placed on the public being made aware of the value of independent regulated advice.
“For example, we have seen an increase in the take up of annuities among our clients, with more than two-thirds qualifying for enhanced terms. We do not believe that more product innovation is required, just better understanding and use of a blend of products which are already available.”
At-odds with government
Intelligent Pensions head of pathways Andrew Pennie pointed out the FCA had backed drawdown investment pathways just a week after the government suggested they would not work well for consumers.
“For users to maximise the freedom and flexibility of drawdown, aligned to their own individual circumstances and objectives, it is best served by individually tailored investment strategies.
“If we are to move to a range of drawdown investment pathways we must ensure users are aware of the limitations and risks of these options and that with advice and a tailored solution, they would be far more likely to achieve a better retirement outcome.”
Curtis Banks group communications director Greg Kingston added: “Government will look with interest at the FCA’s suggestion of drawdown investment pathways, as it directly contradicts their view that default pathways would not be suitable for the majority of people.
“It feels as though the regulator expected a positive government response to the Work and Pension Committee’s similar proposal and now, faced with the opposite, will need to listen carefully to consultation responses. It is difficult to see how the regulator’s proposals can be aligned with government’s opposing views.”