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Poisoned chalice: Warning as providers report record D2C drawdown inflows

Pension providers stung by the barrage of regulatory change over the last few years are finding salvation in the popularity of new non-advised drawdown offerings.

Insurers have lost hundreds of millions of pounds since March 2014 when Chancellor George Osborne announced a programme of reform that has seen sales of annuities more than halve.

A 0.75 per cent charge cap on the default funds of auto-enrolment schemes has also hit firms’ balance sheets, leading to huge writedowns as fees from pensions business were slashed.

But figures from Scottish Widows and Standard Life reveal the growing popularity of direct-to-consumer drawdown products that are meeting customers’ appetite for flexibility and reluctance to pay adviser fees.

Aviva, the UK’s biggest pension provider following its takeover of Friends Life, has also just entered the market. It quietly launched a non-advised product as part of its new direct platform.

However, advisers say it is “deeply worrying” so many people are entering drawdown without advice.

Firms are also battling to reconfigure default investment approaches to ensure customers do not lose out because strategies are targeting the wrong outcome. Consultants say there is a risk of members being failed by strategies that have not adapted to the post-freedom world.

So could new direct products help providers recover lost revenue? Or will they find themselves left on the regulatory hook if non-advised customers make mistakes? And could falling equity markets sting a new breed of drawdown customers unused to making investment decisions or managing their income?


Before the pension reforms, most providers were reluctant to put customers into drawdown arrangements without an adviser for fear regulators would blame them for any poor outcomes.

However, firms quickly realised the flexibilities would lead to small pension pots being cashed out ent-irely and larger savings, that in the past they expected to have been used to buy an annuity, might now go into drawdown arrangements.

Customers’ growing appetite for flexibility around how they take inc-ome and an opposition to paying for advice has seen providers launch new non-advised products.

Five months on from the freedoms coming into effect, Standard Life reports a boom in sales, with direct drawdown its “fastest-selling solution ever”.

To the end of June, there were around 1,800 policies invested accounting for assets under management of around £90m – by the start of August, assets had jumped to £130m.

Scottish Widows has also seen a huge surge in interest, with around 4,000 cases of people moving into its non-advised drawdown product, which has a £10,000 minimum investment.

Standard Life’s product is based around splitting funds into three pots. The first invests in short-
dated gilts and corporate bonds, the second is a lower-risk “buffer” investing in “absolute return-type investments”. The third pot is a medium-risk growth portfolio aiming to sustain assets over the long-term.

Standard Life head of investment solutions Jenny Holt says: “Customers then draw money out of those pots sequentially because that should improve how long the money will last.”

The three pot model aims to minimise the “sequencing risk” inherent in drawdown – the ravaging impact of poor returns in the first years of drawing income, she says.

Sudden equity falls – such as those seen last week when fears over the Chinese economy wiped billions off the FTSE – can take years off how long a drawdown account will be able to pay out.

Holt says: “The reality is investing post-retirement is much more complicated than investing for
accumulation. Most people who have been saving during this phase won’t have made any decisions, so to reach retirement and be faced with complicated tax and withdrawal issues could be quite overwhelming.”

She adds each pot has a “blended” structure, giving Standard Life the ability to change the mix of assets when it sees fit.

She says: “We are closely monitoring customer behaviour and that will allow us to evolve it as we go through. This can be done without consulting the customer as long as the tweaks are still consistent with the fund description.”

In June Aviva launched its first direct-to-consumer platform and in July it added a non-advised drawdown option.

Direct customers need to invest a minimum of £5,000 to open a pension while at least £1,350 is needed to go into drawdown. Entering drawdown is free – customers pay a platform charge and an investment fee.

Customers have two options when selecting funds, a do-it-yourself  or a more guided route.

Aviva head of the direct platform Rodney Prezeau says: “The responsibility that came in with pension freedoms is that the customer has to make an active choice. The industry’s job is to make that as easy and accessible as possible because the average UK consumer doesn’t have the background in making those choices. [For drawdown customers] the first option is if they know what they want to do they can choose from around 2,000 funds using a screener on filters such as fund managers or asset classes – but that’s clearly for someone who knows what they want.

“The other option provides more guidance, what we call our ready-made list. We allow a customer to self-select one of four risk tolerance preferences for their investments. Based on those we then provide two to three different options of funds, it takes the 2,000 funds to a more manageable number a customer can make a reasonable decision on.”

Apart from being unable to invest in insured funds, non-advised customers have the same investment options as advised customers.

Prezeau says: “Those classes of funds aren’t available because of regulation – it’s quite complicated to explain on self-directed sites the differences between those kinds of funds and the different risks consumers are taking. We made a decision to just include publicly traded Oeics and unit trusts. But the underlying assets classes and strategies are very similar to insured funds, the difference is what package you buy it in.”

While some providers are enjoying rapid growth in new non-advised areas, others remain sceptical. Last year, the FCA said it would review handbook rules on the sale of non-advised drawdown and uncrystallised funds pension lump sums following warnings from some providers. Firms such as Legal & General and MetLife have warned of the perils of “get rich quick” product launches that come back to bite providers years down the line.

Wingate Financial Planning financial planning director Alistair Cunningham shares their concerns.

He says: “It’s deeply worrying that so many individuals are choosing to enter drawdown without advice. It’s interesting that Standard Life’s multi-pot strategy initially holds assets that represent an allocation more cautious than an annuity, the second pot potentially illiquid ‘hedge fund’-type strategies making use of derivatives and more complex investment instruments.”


The pension reforms have not only shaken up post-retirement propositions. Pension schemes’ investment strategies that had targeted 25 per cent cash and an annuity purchase suddenly became dangerously out of step.

Yet 18 months from the Chancellor’s announcement, there are signs many schemes have not moved with the times.

Research published by JLT this week shows only 44 per cent of 250 of the UK’s largest companies have adjusted their scheme’s default.

Likewise, a Towers Watson survey of 100 employers found only 43 per cent plan to offer a drawdown option to staff.

Investment manager AllianceBernstein pensions strategies managing director Tim Banks says the firm has been “surprised” by the lack of change. He says: “We thought there would be a lot more reengineering of default investment strategies than there has been. We know that an awful lot of schemes and providers are adopting a wait-and-see attitude and that runs the risk of having strategies fail for members that are close to accessing their savings.”

BlackRock head of UK DC Paul Bucksey says since the 2014 Budget there has been a move away from “risk-rated defaults” where clients were given a choice of cautious, balanced and adventurous versions of lifestyle strategies. “The focus is on the three outcomes – tracking a cash strategy, an annuity or drawdown.”

But Banks says this model is flawed as it relies on members knowing how they plan to use their pot and when they will begin accessing their savings.

He says: “Research we did with the Pensions Policy Institute found most people want to keep their options open and they are intending to make a decision really less than a year before or just after retirement.

“You’re asking people to make choices to a date they don’t know and people actually get less confident about when that will be as they get older. Asking them to pick an option is a bit like looking into a crystal ball – it’s not really a viable alternative.”

Banks says the alternative has been to use multi-asset funds that are “agnostic” as to whether the member takes cash or income “but works in both circumstances”.

He says the charge cap has res-tricted the use of multi-asset funds in provider-led bundled solutions where investment costs only make up a part of the 0.75 per cent charge cap.

Consultancy Hymans Robertson partner and DC specialist Rona Train says some schemes she advises are segmenting members based on projected pot size, assuming smaller pots will cash out while bigger pots remain invested.

But she says segmenting is “much harder” in contract-based schemes.

“Within trust-based schemes there’s much more flexibility in terms of what trustees can do. But in a contract-based world it’s much more down to the provider.

“The way contracts are written will determine whether providers can move members historically. We’ve found that some providers have moved members without individual consent, whereas other contracts just don’t allow that.”

Adviser views

Craig Palfrey, certified financial planner, Penguin Wealth

The emphasis to date has been on launching new funds that focus on providing income, with fund houses believing they can suddenly create a one-size-fits-all fund that meets the current market need. These solutions, they believe, would allow clients who would have historically taken an annuity to have options under the new rules, which provide annuity-style income. The challenge for providers is to deliver products which allow income generation, but remain low risk.

Blair Cann, senior partner, M Thurlow & Co

There is no element of self-interest involved in wanting people to take advice when going into drawdown, just common sense. Despite its many attractions flexible income drawdown is not for those of a nervous disposition.

Expert view

When traditions create unnecessary risks 

Rona Train, Partner and Senior Consultant, Hymans Robertson 

As gilt yields plummet close to all-time lows and with interest rate rises expected in the foreseeable future, pension schemes that retain a “traditional” default lifestyle are sleepwalking into unnecessary risks for their members.

An investment strategy targeting 75 per cent bonds and 25 per cent cash at a member’s selected retirement age will create significant risks for members who do not plan to buy an annuity when they retire.

To put this into context, long gilt prices rose by around 26 per cent in 2014. For members seeking to buy a guaranteed income, this broadly matched changes in annuity rates. For members taking cash, this represented significant capital uplift in the value of their assets.

If we were to see gilt yields rise again and prices fall by a similar amount in the next 12 months, a pension scheme member in the final year of a traditional strategy, and not planning to buy an annuity, would see a fall of around 18 per cent in the value
of their retirement pot.

In a trust-based world, we have already seen the majority of our clients take action on the back of last year’s Budget changes.

Many have used our guided outcomes tool to project forward pot sizes and build strategies that target asset allocations appropriate for what their members are most likely to do at the point of retirement.

Interestingly in contract-based schemes, we have seen providers come out with varied solutions. Some have chosen strategies that retain a meaningful amount of return seeking assets at the point of retirement. Others have built portfolios that invest in a portfolio which is broadly spread across bonds and cash as well as return seeking assets.

But even in a contract-based world, we still believe it is important for companies to make sure the “at retirement” asset mix is appropriate for the membership of their scheme rather than blindly accepting the new defaults offered by providers.

Rona Train is partner and senior consultant at Hymans Robertson 



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There are 10 comments at the moment, we would love to hear your opinion too.

  1. non advised drawdown !!!… Will Scottish Life and Standard Life accept non advised drawdown from us.

    Its nice to see pension freedoms are working for the providers.. they are keeping money on their books

  2. George has opened Pandora’s Box, too late for advisers to put the lid back on, so perhaps we should focus on those that we can help, and not worry about those that we cannot.

  3. Five months on from the freedoms coming into effect, Standard Life reports a boom in sales, with direct drawdown its “fastest-selling solution ever”.

    What absolute tosh. Where do you think the money has come from? From Standard Life pensions of course (the same for SWF). So this is just shifting money from one pocket to another. Yes, they are hanging on to it for longer than they would have done if they had flogged an annuity, but the pot is diminishing. Not really a great business plan is it?

    What is really outrageous is that in Standard Life’s case (I don’t know others – as this is from personal experience) it is actually blackmail that contributes to their “fastest-selling solution ever”. If you have an older PP you cannot access cash and leave a residue invested. If you want to switch to a more modern PP the charge is at least £500, but you can transfer to a drawdown product and pay the not insignificant ongoing charges – for which of course they do not provide advice. Personally I call this a scam at best – a rip off at worst.
    No doubt the Regulator will be running from behind yet again. Thank you George once again for creating such a monumental mess.

  4. The key word or words should I say, is-: “Non-Advice” !

    HL have been doing it for years !!

    Push a rat into a corner and IT WILL try to rip your face off ! Its called survival !

    I don’t condone it, but….. it does, did and will continue happen !

  5. Christopher Wicks 5th September 2015 at 9:35 am

    This is very dangerous for consumers. Most diy investors are incapable of constructing conventional portfolios geared towards wealth accumulation let alone those aimed at decumulation. Frankly most advisers probably aren’t really up to it. The only question is, how many years will be allowed to go by before the regulator ‘discovers’ to its great surprise and horror with much fanfare from the press and politicians what has been going on? All of us in the business in the 1980’s & 1990’s knew about the forthcoming pensions scandal long before it was ‘discovered’. Same for PPI. It always was a scam but nothing was done until after the event. Plus ca change.

  6. If the public do not know what an interest only mortgage is what chance do they gave with drawdown?it was interesting to see an article this week on a retiree who had been “mis sold” his interest only mortgage and wanted the bank to write off the capital due …….guess what he was a retired teacher! no education there then

  7. As we can see from current global events, the UK is the land of milk and honey where everything is free, nobody takes responsibility for their actions and you can draw compensation and benefits from an imaginary bottomless pit of money. Time for a reality check, there are a lot of hard working people out there paying for the irresponsiblity and greed of others.

  8. Actually I feel that much of this is the fault of the national daily press. Today’s Daily Telegraph is getting all indignant with AEGON because if people want to access their cash they have to seek ‘expensive’ advice. No mention that the payment can be taken from the fund.

    This is something I would expect from a tabloid and not from what purports to be a quality daily. This is just symptomatic of the ‘something for nothing’ and compensation culture that prevails nowadays and which the press does much to foster.

    I don’t hear much about audit fees, or the lawyers fees (perhaps here they assume that everyone gets legal aid – in other words we, the taxpayers stump up.)

    Non advised drawdown is probably something that the Government will tacity encourage telling the Regulator ‘hands off – we want the tax”. The new review will probably entrench this all in the name of ‘enfranchising’ the public. What it actually will be is ‘milking the stupid’.

  9. Just like pension transfers and endowment mortgages which were also encouraged by the Government at the time the industry will be blamed when the proverbial hits the fan.

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