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Andy Bell: Drawdown customers don’t want defaults forced down their throats

Bell-Andy-2017-CUT“Government’s first duty is to protect the people, not run their lives,” said former US thespian turned President Ronald Reagan.

This sanity check is always a good test to measure any proposed legislation or regulation; is it paternalistic smothering or sensible protection?

So, how do the FCA’s proposed rules on investment pathways – requiring non-advised drawdown customers to be presented with default fund options –  fare against this test?

On the face of it, investment pathways are well intentioned. They are designed to prevent non-advised drawdown customers from sleepwalking into investing their residual pension pots in cash over the long term after taking their tax-free lump sum.

But two problems spring to mind. Firstly, many non-advised drawdown customers have a clear view of what their investment strategy will be post drawdown and don’t want investment pathways forced down their throats.

Secondly the non-advised drawdown process is becoming horribly unwieldy with layer after layer of regulatory protection being imposed on the process.

On balance, even after acknowledging the weaknesses of investment pathways – they focus only on customer outcomes whilst ignoring risk appetite – I can be persuaded that investment pathways are a force for good.  As long as they are applied proportionately and only targeted at those customers who need them.

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

Unfortunately the FCA’s proposals on how we apply investment pathways to those looking to take advantage of phased or partial drawdown and those transferring in whilst in drawdown are disproportionate enough to be considered unworkable. The key issue is that investment pathways should be used as a backstop to reduce risk where it exists, rather than the main plank of drawdown regulation for all who are non-advised.

For me the key challenge with investment pathways is not the “what” they are, but rather the “who” they are applicable to. Sound arguments have been put forward as to why Sipps should be excluded from investment pathways although I am sympathetic with the reasons why the FCA has chosen not to make a blanket exceptions for Sipps.

There is, however, a compromise that means the non-advised drawdown process would not be further complicated and would ensure that those customers in need of investment pathways are those that are targeted. My proposal would also satisfy the very different operating models of insured personal pensions and Sipps, where the customer journeys at the point of entering drawdown are very different.

I propose that industry is given the option for the obligations on investment pathways to kick in three or six months after someone has entered drawdown (or transferred in whilst in drawdown) – and only apply them to those customers who remain heavily invested in cash at that time.

The percentage of the drawdown pot that is invested in cash over which investment pathways would need to be offered requires further consideration, but could be set at 50 per cent, 75 per cent or 100 per cent. If the FCA is pure to its stated aims, this hurdle would be set at 100 per cent as anyone who has invested any of their drawdown fund will to some extent have engaged with the investment process and would therefore fall outside of the FCA’s target audience of disengaged investors.

By adopting my proposal, this will avoid imposing investment solutions on people who clearly already have an active investment strategy and who would not welcome interference from their pension provider. But it would still ensure that disengaged customers are identified quickly after moving into income drawdown and offered an investment pathway, which is exactly what the FCA is trying to achieve. Of course, those providers that want to embed the investment pathways into the drawdown process at the outset would be free to do so.

This route would provide sensible and comprehensive consumer protection for those that need it, without telling informed and active investors how to run their portfolios. Let’s not cuddle non-advised drawdown to death.

Andy Bell, chief executive of AJ Bell



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There are 3 comments at the moment, we would love to hear your opinion too.

  1. A sensible approach (IMO) might be to ban non-advised IDD at a rate of more than 4% p.a. of the value of the fund and to offer a choice of just 3 model portfolios (cautious, cautious to medium and medium to higher risk), with NO cash (because IDD from cash at anything but a small fraction of a percent 100% guarantees capital depletion).

    Trouble is, the FCA is constitutionally incapable of approaching anything with clarity and simplicity in mind. Its eternal obsession with the idea of “putting clients in a properly informed position” is just pie in the sky fantasy. The more information clients are plied with, the less they engage and the more likely they are to make incorrect decisions. But there are none so blind as those who won’t see.

  2. The problem seems to be that the FCA has a limited number of profiles of person entering into drawdown and yet they draft provisions (such as the limited pathways) that bind everyone. For instance some people enter into drawdown whilst they are still employed (eg albeit on a 3 day week). The very complex rules on prohibited investments specified by their employer (for example major auditing or finance companies) can for instance in practice limit SIPP investments to mainly cash in the remaining years of employment. If the individual understand the implications and have a coherent investment plan, they should be permitted to proceed with a SIPP rather than not to undertake a SIPP due to proscribed limited pathways.

  3. In reality the problem is actually quite simple.

    The government cannot resist the idea of interfering in people’s lives and or protecting them from themselves.

    Whereas the reality is the people only learn from their mistakes when they are forced to suffer the consequences of them.

    The solution to the problem is very simple.

    1.) All clients asking for non advised drawdown should be provided with a single page factsheet they need to sign which explains the basic reasons why advice is very important.
    2.) They have to pass a simple test, which makes sure they have actually read the factsheet, before they are allowed to “sign it”
    3.) The factsheet, should include the warning that if they deplete their funds they will NOT have recourse to state sector benefits, such as pension credit.
    4.) If they still insist they wish to do non advised drawdown, they should be allowed to do so with little if any restriction on what they do, what they take etc.
    5.) the provider should be required to issue a letter each time the fund reduces by more than 10% from it’s starting value, with a reminder that seeking advice could be very important.
    6.) If people deplete the fund, having not been advised then they have no recourse via the FCA or FOS or state benefits, it’s called tough, you didn;t listen.

    People will only learn when they are forced to suffer the consequences of their own actions.

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