“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.
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