All change, please! The FCA’s ‘one size fits all’ solution to harmful retirement outcomes

Estimated reading time: 3 minutes

In June 2018, the Financial Conduct Authority (FCA) published their “Retirement Outcomes Review – Final Report” (ROR FR), which followed on from the Interim Report that they issued last year.  Their Report was accompanied by a Consultation Paper, entitled “Proposed changes to our rules and guidance”.

The overriding objective of the ROR FR is to provide an “…in-depth look at how the pensions and retirement income sector has been working since the pensions freedoms were introduced in 2015.”  The FCA found that whilst consumers have largely welcomed the freedoms, “…some are at risk of harm”; in particular, those in drawdown who do not have a financial adviser.

The accompanying Consultation Paper therefore focusses on a “proposed package of remedies”, which aims to address the harms and emerging issues that the FCA identified, and “…put the market on a good footing for the future”.

They plan to achieve this by facilitating better consumer choices before accessing their pension benefits, at the point of accessing benefits, and throughout the duration of their retirement.

The Consultation Paper includes topics for discussion and topics for consultation.  Of the 49 questions included in the Paper, 36 of them deal with the discussion topics, whilst the remaining 13 focus on the consultation topics. 

For the latter category, changes to the FCA’s “Conduct of Business Sourcebook”, (in essence, a ‘rule book’ that regulated pension providers and advisers must adhere to), have already been drafted, and include proposed changes to, amongst other things, ‘wake-up’ packs and ‘Key Features Illustrations’ (KFI). 

A ‘wake-up’ pack is comprised of information relating to options for drawing pension benefits, and is currently sent by providers to their clients four to six months before their intended date of retirement.  Anecdotally, the packs are often ‘put to one side to be read later’ and remain unread, or are deemed full of pension jargon that consumers find impenetrable.

The FCA therefore want to increase consumer engagement in deciding which retirement income option(s) would be best for them, by proposing that ‘wake-up’ packs are much shorter, are written in “clear and accessible language”, include one side of retirement risk warnings, and are issued to consumers from age 50 and every 5 years thereafter.

For those consumers going into Flexi-Access Drawdown and thereby receiving a KFI, the FCA propose to tackle their findings that drawdown charges “…can be complex, opaque and hard to compare” by requiring providers to include a front-page summary of key information with the KFI that incorporates a one-year single charge figure in pounds and pence, as well as showing figures in ‘real’ terms that take inflation into account.

Although the majority of their proposals arguably make common sense, implementing the changes and embedding them into a provider’s processes will incur significant time and expense.

The former category of proposals is even more far-reaching; particularly for the providers of self-invested pensions, (for example, SIPPs and SSASs).  Perhaps the most radical of these is the introduction of three ‘default investment pathways’ for consumers at the point of first entering drawdown - offering ‘cautious’, ‘balanced’ and ‘adventurous’ risk profiles - to ensure that the non-advised consumer’s pension fund is invested in a mixture of assets that are appropriate to their circumstances and requirements, rather than being wholly invested in cash, (whether they are aware of that or not).

Whilst this proposal will undoubtedly be helpful to some consumers, the FCA potentially intend to apply this to the whole of the market, including self-invested pension providers.

This ‘one size fits all’ approach suggests a lack of consideration of the different profiles and needs of SIPP and SSAS investors, when compared with other members of pension arrangements, (for example, those who have been auto-enrolled into their employer’s workplace pension scheme).

In our response to the FCA’s Consultation Paper, we have requested that self-invested pensions should be ‘carved-out’ from the requirement to create default investment pathways for its members.  As the product name implies, the decision as to how and where to invest the contributions and any transfers-in is the responsibility of the member or trustees, rather than their provider requiring them to choose one investment pathway from a choice of three. 

As things currently stand, the possibility exists of self-invested pension providers having to create - at significant cost and resource – an investment ‘solution’ that members of self-invested pensions simply would neither need nor want.