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Andrew Tully: Finally, progress on retirement outcomes

Given the pace of change since pension freedoms, it is hardly surprising so many issues have emerged requiring regulatory intervention

Two and a half years after the FCA set up its Retirement Outcomes Review, it seems to be reaching some conclusions at last. Its latest policy statement released last month introduced changes from November to wake-up packs, retirement risk warnings and the annuity information prompt.

Changes aiming to make drawdown charges clearer and easier to compare will follow in April 2020. Meanwhile, a consultation has been launched into default investment pathways.

Wake-up packs
The FCA wants to boost consumer engagement as people reach retirement. One issue with the current wake-up process is that people have often decided what course of action they will take before they receive the pack and accompanying risk warnings.

FCA goes ahead with one-size-fits-all investment pathways for drawdown

To try to help people understand their options before they have decided what to do, providers will need to give them a single-page summary document at age 50 to coincide with when they can access guidance from Pension Wise.

Then more traditional wake-up packs – still including a single-page summary – will follow four to 10 weeks before age 55, and every five years following, until people have fully crystallised their benefits.

Providers will need to prioritise which retirement risk warnings to include based on information they hold about the client.

From age 55, they must always include a statement which says accessing the pension at that point may not be the best option.

The annuity information prompt came into force in March 2018. It requires firms to give annuity quotes in a prescribed form and show whether another provider offers a higher income.

Changes will be introduced to improve the position for people potentially eligible to buy an enhanced annuity. Around two thirds of people should qualify for a higher income because of health or lifestyle conditions, so this is a positive development.

Drawdown charges
Following on from these moves, changes in April 2020 aim to clarify drawdown charges. The FCA has found weak competitive pressure and low levels of switching in the non-advised drawdown market. Ninety four per cent of consumers who accessed their pots without taking advice accepted the drawdown option offered by their pension provider, compared with only 35 per cent of advised consumers, which highlights the huge benefit people get from seeking independent advice.

How can advisers help clients plan for an early retirement?

The first page of a key features illustration will be a summary, showing the first year’s charges in pounds and pence.

KFIs will also need to show figures in “real” terms, taking into account inflation, which brings drawdown into line with pension savings projections. This makes projections of future annual income more comparable with the purchasing power of someone’s current income.

On a related theme, the new Single Financial Guidance Body (hopefully it gets a snappier title soon) is building a drawdown comparison tool to help consumers compare products and shop around.

The difficulty here is the complexity. To get a proper comparison would likely need a great many inputs which consumers are unlikely to have the inclination or detailed knowledge to complete. But few inputs may not give a hugely helpful output.

Investment pathways
The FCA’s consultation into investment pathways (CP19/5) closes in April, with a policy statement due in July.

Investment pathways are intended to help non-advised clients choose a suitable investment profile.

The regulator has increased the number of suggested pathways to four (its initial proposal last year was for three).

Each of these pathways is mapped to a different client objective. For example, option one is “I have no plans to touch my money in the next five years”. It is worth noting there is no client risk appetite included within the pathways.

Are default drawdown pathways a good idea? Industry heavyweights weigh in

For the first option, one client may have this objective and have little appetite for investment risk, while another could have the same objective but be willing to take on considerable investment risk.

Both would use the same investment pathway – unless they made an active choice to use an alternative investment.

While these are aimed at non-advised consumers, all providers who have at least 500 non-advised drawdown customers must offer them, either directly or by referring to, for example, the SFGB’s drawdown comparator tool.

As information is likely to be prominently displayed on providers’ websites and within their literature, you may be asked about investment pathways by your advised clients.

The FCA is also proposing clients have to make an active decision to be invested in cash and need to be given suitable warnings – initially and ongoing – about the downsides of investing in it.

For these investment areas, the regulator intends to respond to its consultation in July and implement its proposals a year later.

Given the pace of change since the pension freedoms, it is hardly surprising there are a number of issues emerging which require regulatory intervention.

It also displays the downsides of the government introducing such fundamental change almost overnight, with little time to consider the future consequences.

Andrew Tully is technical director at Canada Life

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