Needle in a haystack? Looking for advice in the FCA’s retirement outcomes paper

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Estimated reading time: 8 minutes

The Financial Conduct Authority’s (FCA’s) Consultation Paper of January 2019 sets out their second proposed package of ‘remedies’ arising from their “Retirement Outcomes Review” (ROR). Within it, they consult on introducing ‘default investment pathways’ for those in drawdown on a non-advised basis, as well as other proposed changes to their rules and guidance.  To what extent, however, have they already made up their mind and why is the Paper virtually silent on arguably the best remedy of all – namely, seeking advice?

As you will see from my related blog, the FCA simultaneously issued a Policy Statement and Consultation Paper in January 2019, in response to its Consultation Paper (CP) that accompanied their “Retirement Outcomes Review – Final Report” (ROR) in June 2018. 

While my related blog focuses on their Policy Statement, this blog addresses the contents of their January CP. The focus of the ROR are those consumers who choose to draw down their pension funds without taking regulated advice – an expanding cohort that I refer to in this blog as ‘non-advised draw-downers’ (or NADs for short).

"The focus of the ROR are those consumers who choose to draw down their pension funds without taking regulated advice."

The FCA’s overriding concern is that NADs are most at risk of harmful outcomes in retirement - particularly as a sizeable proportion of them are fully invested in cash (or ‘cash-like assets’), even though they do not intend to withdraw their funds in the short term.

Last June’s CP therefore set out the FCA’s proposed ‘remedies’ in response to the ROR’s findings, while January’s CP consults on the three remedies that they raised for discussion last year; namely, investment pathways, ensuring investment in cash is an active choice, as well as actual charges information.

We responded to their latest CP and are now awaiting publication of their final rules during July. Somewhat ominously, 24 pages of draft text for the FCA’s handbook of ‘rules’ are included at the back of the CP, which makes one wonder to what extent responses will be considered, and significant adjustments made to the draft text where appropriate?

Arguably, the most controversial remedy within last June’s CP was the FCA’s proposal to introduce a number of ‘default investment pathways’ (DIPs) across all pension providers involved in the decumulation marketplace, irrespective of the type of pension ‘wrapper.'  This is controversial because the government had already rejected the idea, stating that it was “inconsistent” with the pension freedoms.

The idea behind DIPs is that they would offer NADs a choice of ready-made portfolios of different asset classes, to help meet specific retirement objectives and ensure that drawdown funds did not languish in cash over several years. 

In our response last year, we argued that bespoke SIPP providers like ourselves should be ‘carved out’ of the requirement to offer DIPs, given that the ‘self-invested’ nature of such pension arrangements typically mean that our clients prefer to make their own investment decisions, rather than have a ‘solution’ forced upon them.  As a result, significant cost, time and resources could be expended on creating nothing more than a ‘white elephant’.

Despite our protestations, the FCA has persisted in pursuing the introduction of DIPs across all pension providers in their January CP, save for one concession that “small” SIPP providers with under 500 non-advised customers going into drawdown each year will not be compelled to offer DIPs within their product proposition, if and until that number is exceeded.

If this remedy becomes mandatory, providers will have to offer a different multi-asset investment pathway for each of the following four retirement objectives that a NAD can choose from.

  • Option 1: “I have no plans to touch my money [i.e. drawdown fund] for the next five years.”
  • Option 2: “I plan to use my money to secure a guaranteed income within the next five years.”
  • Option 3: “I plan to start taking my money as a long-term income within the next five years.”
  • Option 4: “I plan to take out all my money within the next five years.”
Providers would then be required to provide a prompt for NADs to review their prevailing investment decision at each five-year anniversary, if they remain in drawdown.

To be clear, we are not against DIPs per se. For many NADs they could provide an appropriate home for their drawdown funds, and offer them the potential for better investment returns than those achieved by retaining their entire fund in cash.

Rather, it is the ‘one size fits all’ approach that the FCA are wishing to adopt, regardless of the type of provider and product concerned, that speaks of an over-simplified solution to the reality of remaining in drawdown on a non-advised basis.

Therein lies the ultimate irony of the CP as a whole.  Surely an even more obvious remedy to the multitudinous risks that prevail by not receiving advice whilst in drawdown – is to seek advice.

Yet the mention of “advice” and “advisers” as a solution to avoiding harmful outcomes in retirement are merely sprinkled throughout the CP as something of an afterthought, despite the proliferation of underpinning research, commissioned by the FCA itself, that demonstrates the benefits of employing regulated financial advice to help maximise an individual’s outcomes in retirement.
Last June’s ROR Final Report revealed that a significant number of people who opted to go into drawdown were automatically being defaulted by certain providers into cash, and even more worryingly, some consumers didn’t even know that they were wholly invested in cash.

The FCA’s remedy to the potential financial harm of remaining fully in cash over years, if not decades, was to propose that any cash investment undertaken by the consumer is an active decision and that the drawdown provider should provide written warnings on an ongoing basis if they continue to remain heavily invested in cash.

We fully supported these proposals in our response to January’s CP, as we were shocked by the FCA’s findings, outlined above.  Indeed, and arguably in contrast to their proposals regarding DIPs, this one simple measure could very well be the most effective one outlined in the entire CP.  

We also welcome in principle the proposal of issuing periodic reminders to those NADs who retain a majority of their pension fund in cash, outlining the potentially adverse consequences of remaining in cash over the longer term and missing out on more significant investment returns potentially available from other asset classes, (for example, equities and property).  This represents another simple, practical and achievable measure that stands to deliver significant benefits over time.

Our only caveats regarding this remedy are to propose that the warnings – where required - are provided as part of the client’s mandatory Annual Benefit Statement (ABS) and not as a separate disclosure issued every 12 months after first entering drawdown. 

Additionally, the FCA are looking to providers to keep records of what proportion of a consumer’s pension fund was held in cash at each review point.  We believe that it would be less complex if this requirement is aligned with ABS/policy anniversary dates, rather than the date of first entering drawdown, in order to minimise additional costs without harming the objective.
The third remedy outlined by the FCA is that NADs should receive written notification from their provider of the total annual charges that they have incurred from being in drawdown, expressed as a cash amount rather than as a percentage of their fund.

As well as the drawdown provider’s own fees, charges can also arise from using a third party investment manager to oversee investment of the fund, transaction charges where investments are bought and sold  and adviser charges where the consumer receives ongoing advice relating to their drawdown arrangement.

We agree that the charges consumers pay for being in drawdown should be clear, fair and transparent but in seeking to achieve this care must be taken to avoid duplication, confusion and information-overload, where specific charges arising from different parties are communicated to the consumer more than once.  

This would be best avoided by each party communicating their specific charges separately to the consumer in cash terms (and potentially copying in the provider for their records).  Ultimately, it is important that a consumer understands how much they are paying to each of the parties connected with their drawdown product.

Given the scale of the potential changes proposed within the CP, we believe that the FCA should publish its findings after the changes have been implemented, in order to determine whether the anticipated benefits have been realised; i.e. not just because of the scale, but because it demonstrates good practice and should lead to better regulation in future.

In addition, the FCA should be more explicit in demonstrating how it has analysed the responses it receives to the CP and build this into their final Policy Statement that is due in July. Including pages of draft handbook text at the back of the CP suggests – rightly or not - that their mind is already made up and that the consultation process is nothing more than paying ‘lip service’ to pension providers.

A significant proportion of the benefits currently attributable to DIPs could be achieved by simply prohibiting the ability to use cash as a default investment option. We firmly believe that there is merit in making this change in isolation firstly and then assessing its impact before proceeding with investment pathways.

Importantly, NADs may not appreciate that DIPs do not offer active oversight of performance on an individual basis as a financial adviser would provide and that the ‘commoditised’ and uniform presentation of DIPs across providers could lead to consumers failing to understand the investment risk of the proposition they’ve opted for.

In summary, there are positive points to be taken from the proposed remedies within the FCA’s CP. Arguably, however, the best remedy of all would be for those currently in drawdown on a non-advised basis to receive regulated financial advice. This is an obvious solution that, somewhat puzzlingly, only attracts scant attention within the document itself.

Further reading: Retirement Outcomes Review: Investment pathways and other proposed changes to our rules and guidance