With the FCA today setting out new rules for non-advised consumers entering drawdown to make sure they get better outcomes, is the regulator right to set up a number of default investment pathways?
Interactive Investor head of personal finance Moira O’Neill
Cash is king for a significant number of consumers, but today’s FCA proposals suggest it has reigned over pension planning for far too long. It is a theme that runs throughout much of today’s policy detail. Proposals to make cash exposure an active choice, rather than a default option, will go a long way towards ensuring consumers are not sleepwalking into retirement wondering what could or should have been.
It is concerning to see FCA research suggesting some 18 per cent of non-advised Sipps in drawdown are 80 per cent or more invested in cash, and so in this context pension pathways look sensible. We strongly agree that a single default investment pathway is not the answer – there is no room in pension planning for a one size fits all approach, and we believe in a goals approach. We also think firms should be given the flexibility to present the investment pathways in the manner that is most appropriate to their client base.
We believe that the ‘investment pathways’ element needs careful consideration, particularly in the context of self-directed investors using Sipps, where maintaining the current approach to managing their portfolio is likely to be the right choice for most clients (especially when starting to draw benefits when in their 50s and 60s).
Pensions and Lifetime Savings Association policy lead George Currie
Since the adoption of the pension freedoms, savers have been faced with very complex decisions at retirement. We welcome the FCA’s proposals as a step towards helping non-advised customers make better choices when they take out a drawdown product. In particular, the proposals help avoid the risk of people leaving their pension pot in cash when it would make more sense for it to be invested. We also welcome the emphasis placed on trying to ensure that savers have the right framework to support them in their decisions.~
In our Hitting the Target report, published last summer, we argued that non-engaged savers should benefit from choice architecture that helps them understand their objectives and, with the help of fiduciaries and providers, find solutions that align with Government-mandated principles. We envisage that these solutions would be a blend of cash, flexible income from investments, and guaranteed income.
Canada Life technical director Andrew Tully
Four years ago, freedom and choice turned the retirement savings market on its head. Given the pace of change, it is hardly surprising there would be a number of issues emerging which would require regulatory intervention.
The FCA has found consumers entrenched with their holding provider, seemingly unwilling, or without the knowledge, to switch their provider. Weak competitive pressure and low levels of engagement are particularly acute in the non-advised drawdown market and the regulator is rightly focussing on a package of measures to help address this.
To illustrate the point, 94 per cent of consumers who access their pots without taking financial advice accept the drawdown option offered by their pension provider, compared to only 35 per cent of advised customers. This shows the huge benefit people receive from seeking independent advice.
Ready-made drawdown investment solutions will be like the ready-meals of retirement. They are unlikely to satisfy for long and certainly won’t be winning any Michelin stars. There will be in-built limitations around risk to be appropriate for the widest range of consumers with fairly straightforward needs. Most people will want a perfect outcome for their individual retirement objectives and this is far more likely to be delivered through seeking proper regulated financial advice.