The FCA’s proposals aim to limit damage from poor choices rather than provide the best solution. This is where advisers come in
In the latest instalment of the Retirement Outcomes Review (CP19/5), published at the end of January, the FCA put forward some sensible remedies. The headline measure of default investment pathways will provide non-advised drawdown customers with clear solutions to match their retirement choices.
The paper also proposed making investment in cash an active choice, at least in part because the FCA found some 33 per cent of non-advised drawdown consumers were holding it alone.
While this may be suitable for those planning to draw down their entire pot over a short period, it is clearly unsuitable for someone planning to do so over a longer timeframe, potentially leading to a lower income in retirement.
To remedy this, the FCA has proposed pension providers must give customers warnings about the likely impact of investing in cash on their long-term income, both when they enter or transfer into drawdown, and on an ongoing basis.
Charges are another prominent topic. The paper proposed that firms tell customers drawing on their pension how much they have paid in charges over the previous year.
Importantly, this figure would be in pounds and pence, and would also include any transaction costs.
Finally, it was recommended wake-up packs are sent to customers from age 50, rather than six months before a pre-selected retirement age.
This will give people more time to consider their options before they are able to access their savings.
While these proposals are welcome and necessary for non-advised customers accessing their pension, they are not a panacea.
Their ambition appears to be to limit damage from poor choices, rather than provide the best solution for any individual.
For example, default pathways will see savers defaulted into the option most relevant to their intended choice and they may never question it. That pathway may not reflect their personal attitude to risk and it will almost certainly ignore their capacity for loss.
We also know from automatic enrolment that defaults are great for getting people started, but that they tend not to make active choices thereafter.
If a customer says they intend to buy an annuity within the next five years, they will follow one investment path. But what happens if the saver changes their mind?
How likely are they to inform their provider of this and be moved to a new and more appropriate path?
That is why default pathways could create an opportunity for advisers. Savers will need help to understand whether they have defaulted into the right option. They will also need help if their plans change. It may mean advisers need to adapt or create new processes that allow them to maintain a relationship with more mass-market customers in the future, and a process for intervention when needed.
The FCA paper also makes it clear that providers will not be offering personalised recommendations, even where they default savers into a pathway. That leaves plenty of space for advisers to fill the demand gap. People still want to be told what they should do and why.
Currently, providers are forced to treat savers the same, regardless of the amount they have saved.
That means someone with a pot worth £5,000 must take part in lengthy conversations about annuities and flexi-access drawdown, neither of which are of any use or relevance to them.
We need a simpler journey for these people; one that focuses on how they can extract their money over a reasonably short period in the most tax-efficient manner.
There is, of course, also the big question of how much people should pay for a default option.
There needs to be a clear focus on value here and not just a race to the bottom when it comes to charges.
Volatility can have a devastating effect on someone who is in retirement when they do not have the years ahead of them to claw back large losses. It is worth paying a little more to reduce that risk.
Overall, I am encouraged by the FCA’s work in this area. The industry has been crying out for a way to give customers some direction when they are approaching retirement.
Default pathways are a good next step, without treading on the toes of the advice sector.
John Lawson is head of financial research at Aviva