By putting so much power back into the hands of the saver, the pension freedoms were always going to lead to a lottery of outcomes. While there have certainly been some positive stories, financial literacy is poor – and knowledge of pensions options particularly so. It’s three years in, and the FCA has just dropped a mammoth paper, the Retirement Outcomes Review, to try and mitigate the worst of the fallout.
We’ve devoted a whole five pages to that review for our cover story this week. It turns out that, according to the FCA’s research, commentators have overhyped fears of spending splurges on Lamborghinis. What we have grossly underestimated, however, is the number of pensioners withdrawing their pots only to stick them into cash with a rubbish return.
A third of non-advised drawdown consumers are wholly-holding cash, the FCA has found. That is around 50,000 people losing tens of thousands of pounds-worth of investment growth over the period of their retirement.
The shocking fact is that some of these have been defaulted into cash by providers who essentially took advantage of the knowledge that so few would bother to shop around for a better deal.
To combat this, the FCA is proposing providers should set up default investment pathways that map to common client retirement journeys: those wanting income in retirement, those who want to take the money over a short period, and those who want to stay invested but make occasional withdrawals.
Those with a good memory may well baulk already. Don’t these bear a striking resemblance to the default pathways for decumulation that the government rejected just a week before the FCA’s report?
In certain areas, the pensions and investment industry has had it too good for too long
But the one-size-fits-all idea that fell foul of the Department for Work and Pensions is not the same thing as the multi-branch approach of the FCA. Both government and regulator can get behind the rest of the ideas in the FCA’s paper too, for example on making drawdown charges clearer and establishing more effective ‘wake-up packs’.
Should the proposals for default investment pathways get the go-ahead, it is still going to be a pain for providers. But, and I’ve said this before, there are areas where the pensions and investment industry has had it too good for too long. Non-advised drawdown – specifically lack of competitive pressure and oversight – is one of them.
To their credit, pension providers have not mounted a staunch defence of their legacy practices in the same way asset managers did when the FCA reviewed their industry last year.
Let’s hope advisers, and the benefits of advice the FCA has duly noted, continue to drive regulation in the post-freedoms world.
Justin Cash is editor of Money Marketing . Follow him on Twitter