The Financial Conduct Authority (FCA) is considering whether it should ‘decouple’ the ability to take tax-free cash from a pension from the decision about what to do with the remainder of a pension pot.
The suggestion was made in its Retirement Outcomes Review interim report, out on 12 July, in which the regulator expressed concerns mass market non-advised consumers were vulnerable in the drawdown market.
The regulator said some consumers were moving out of accumulation products and into their own provider’s drawdown product to access tax-free cash because their schemes did not have an encashment feature.
It was concerned many did this without considering whether it was value for money, or suitable for their needs, and said a lack of shopping around could mean crumbling competition, which could subsequently lead to consumers paying higher charges.
The FCA said ‘decoupling’ the ability to access tax-free cash from the decision about what to do with the rest of a pension pot would “ensure that consumers only have to make a choice about their retirement income product at a time when they are ready to do so, for example, when they are considering fully or partially retiring”.
The suggestions follow the regulator’s review, which found drawdown had become much more popular following the pension freedom reforms, however consumers were increasingly accessing drawdown without taking advice. Before the freedoms, 5% of drawdown was bought without advice compared with 30% now, according to the FCA.
As well as gathering information to find out what harm is arising from savers buying drawdown products before they are ready to retire, the FCA said it will work with HMRC, HMT and providers to explore whether there are any legalities preventing consumers from accessing their savings without moving into drawdown.
It also said it will explore with the industry whether this proposed intervention will become a legacy issue as providers update their product ranges to reflect pension freedom rules.
‘Default investment pathways’
The FCA also proposed pension providers could be introducing ‘default investment pathways’ for consumers in drawdown.
The FCA said existing default accumulation strategies had proven “very popular”, pointing to the fact that 99% of NEST customers were in a default fund. It could also impose charge caps on such default investment pathways, it said.
The watchdog laid out the following example of how default investment pathways could work in practice:
• The firm would be required to offer at least one default pathway. The default pathway would have a high-level objective and set out the strategy it will use to achieve this aim. This could be reflected by its name.
• In terms of its investment strategy and asset allocation, the default pathway(s) would take account of the likely characteristics and needs of the target customer group. If different groups of customers have diverse needs firms might decide that more than one default arrangement is necessary to meet those needs.
• The firm would ask the consumer to express their desired retirement outcome and then offer them the default pathway which most closely matches their retirement choice.
• Firms would actively review the appropriateness of the default investment pathways to ensure they remain appropriate for their customers and their expressed retirement choices.
• They would remind their customers of how their default investment pathway relates to their expressed retirement choice. If their retirement choice changes, they may need to switch into another investment pathway.
Despite its proposals, the FCA said it was “too early” in the pension freedoms world to judge whether consumers were making poor choices about their drawdown strategies.
The “largest” pension providers told the FCA most consumers have not yet started withdrawing regular retirement income, it said.
The regulator also recognised there is a risk it could prevent market innovation by defining default strategies in a developing market. It said it will look to Australia, which has similar market conditions and issues with its drawdown market, for inspiration.
The FCA is inviting feedback on the initial findings and recommendations, and aims to publish a final report in the first half of 2018.
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