With the publication of its CP15/30 consultation paper earlier this month, the FCA added to the seemingly never-ending legislative and regulatory developments to pensions.
While the paper purports to deal with the aftermath of the pension freedom changes, in reality it covers a wide range of topics, including design and distribution of products, projections and the second line of defence. The irony that a paper dealing with improving communications with customers is 139 pages long and makes for fairly tortuous reading is perhaps best glossed over.
The consultation considers ways to enable customers to make informed decisions and encourage them to explore the full range of options when they reach retirement, including shopping around on the open market.
While clearly not a new concept, it is worrying – and frankly ridiculous – that only about 45 per cent of people currently shop around for an annuity. The comparable figure for drawdown is marginally higher at 55 per cent but the overall point is clear: too many customers do not shop around for the best deal, potentially leading to them getting an inferior outcome.
These are scandalously poor figures and require firm and decisive action from the regulator. Much more firm and decisive action, I would suggest, than this consultation proposes. In 2016, requirements may be introduced to help people compare annuity income from different providers, to replace wake-up packs and to supersede the Association of British Insurers Code.
While this will hopefully help more people get a better result, it seems to be tinkering around the edges, rather than making any fundamental change to dramatically improve customer outcomes.
The ABI Code prevented members from sending annuity application forms with wake-up packs unless specifically requested by the customer. The FCA proposes incorporating this into its rules and extending it to cover any retirement income solution, such as drawdown or uncrystallised funds pension lump sums, which is a positive step.
In a similar vein, where illustrations are not required but a provider wants to produce these, the FCA proposes an illustration is provided for each of the retirement income options. However, rather than simplify matters, this could result in a customer receiving a vast quantity of paperwork, which surely is not conducive to good decision making.
The consultation also includes a number of measures relating to the new pension freedoms. This greater choice means people have unlimited access to their pension pot from age 55, which obviously increases the risk it may not last their remaining lifespan. The consultation recognises this and suggests providers should demonstrate to customers the sustainability of their withdrawals.
This is a key aspect and it is important customers are told simply and clearly how long their withdrawals may last. For example, showing a customer funds may run out at a certain age and they have a very high likelihood of being alive at that date may make them pause and consider whether the action they have chosen is appropriate. The FCA needs to make sure any communication in this area is very simple for customers to understand, unlike the hugely complex, and largely meaningless, drawdown critical yield calculations.
Elsewhere, the FCA wants to treat the new option of UFPLS similarly to income drawdown. As both allow customers to achieve the same, or similar, outcomes, that is a sensible step. There are also proposed amendments to the second line of defence measures, which were brought in last March and require retirement risk warnings to be given to customers. The FCA believes firms should not be required to ask the customer questions in order to identify potential risks where funds are below £10,000 and there are no safeguarded benefits.
This is only a snippet of the changes proposed by the FCA. For those suffering from insomnia, a read of the full document will easily provide a cure. Despite that, there is a number of important issues that should not be overlooked. In particular, anyone who wants to influence the scope of the Retirement Outcomes Review, which will focus on how the reforms have affected the market and the outcomes people are getting, needs to respond by the end of the month. Given the lack of shopping around, this is a crucial area where the FCA needs to act strongly and decisively.
Andrew Tully is pensions technical director at Retirement Advantage