Should income drawdown be sold on a non-advised basis? Trailing through the MM archives, it seems both the FCA and its predecessor have long held concerns about the risks of entering into drawdown contracts without advice. According to pensions commentator Alan Higham, when a former FSA pensions boss was asked this same question back in 2011, the answer that came back was a categorical “No”.
Last year it emerged non-advised sales would be a particular focus when the time comes for the FCA to review pension freedoms advice. Senior technical manager Rory Percival said the regulator was worried the risks of drawdown were not being managed in the non-advised space. This was followed soon after by director of competition Mary Starks, who said the failure among savers to compare drawdown products was an area of concern.
Yet despite the regulator repeatedly voicing these reservations, we now find ourselves in the position where a surge in demand for non-advised drawdown has directly coincided with around a 20 per cent fall in the FTSE 100 since pension freedoms were introduced. As traders try to second-guess the fortunes of the US, China, and the beleaguered oil giants, savers who decided to draw down an income have seen market losses compounded and their pension pot eroded as a result.
It was all too easy for Chancellor George Osborne to grant savers the power of pension freedom, and to espouse the value of allowing them to do what they want with their hard fought pension pot.
What escaped him, though apparently not the FCA, was the need to underpin that freedom with the appropriate safeguards. While it is true we have some advice requirements, there is nothing governing drawdown in relation to the risks of pound cost ravaging, and the suitable investment strategies needed to maintain a retirement income for as long as possible.
Many providers have piled in to non-advised drawdown and taken varying approaches on protecting consumers, such as minimum pot sizes, “bucketing” risk strategies, restricted investment ranges and limiting non-advised drawdown to insistent clients. Further intervention from policymakers may yet be needed.
It was little over a year ago that another FCA boss, ousted chief executive Martin Wheatley, warned about rushing things that are “not properly thought through”. This was in the context of pension freedoms products rather than the reforms themselves. But if, as predicted by some, drawdown becomes the next misselling scandal, his words may come back to haunt the very man who forced Wheatley out.
Natalie Holt is editor of Money Marketing. Follow her on Twitter: @Natalie_Holt_MM