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Target practice: FCA takes aim at freedoms failures

Michael Klimes finds widespread support for reforms but some want watchdog to go further

Arrows hit target.The film A Bridge Too Far depicts the bungled attempt by the Allies to end the Second World War before the end of 1944 by taking a shortcut through the Netherlands to finish off Nazi Germany. The plan, known as Operation Market Garden, was ambitious but failed to deliver the knockout blow.

Three years on from the pension freedoms, the FCA faces a similarly gargantuan task to make the best of the reforms. In more than 200 pages of study and consultation published last week – the final piece of its Retirement Outcomes Review – the regulator took aim at unfolding concerns in pensions provision. But did it hit the right target?

Laying the groundwork

The pensions industry seems to agree that there is plenty of detail in the FCA’s work, with a number of solid reforms to empower consumers.

The two proposals in the Retirement Outcomes Review that have received the most vocal support include forcing providers to establish default investment pathways for drawdown and sending wake-up packs to consumers from age 50.

To improve wake-up packs, the FCA wants the incorporation of a one-page headline document in accessible language; risk warnings from age 50 onwards; and for the packs to be sent every five years until the customer accesses their pot.

On drawdown, the FCA says providers should offer ready-made drawdown investment pathways that reflect standardised consumer objectives. This could help address an issue the watchdog’s research found when comparing the behaviour of advised and non-advised consumers in drawdown.

There are missed opportunities that we are urging the regulator to reconsider

The research shows 94 per cent of consumers who accessed their pots without taking advice accepted the drawdown option offered by their pension provider, compared with only 35 per cent of advised consumers. The problem of consumers not shopping around is certainly one area the FCA wants to address.

Another issue the FCA has in its sights is the danger of consumers being invested totally in cash during drawdown and how it might encourage more suitable investments. The research shows a third of non-advised drawdown consumers are wholly holding cash, which may suit those planning to drawdown their entire pot over a short period. However, the FCA points out these same consumers could get an income pot up to 37 per cent higher over 20 years by moving to a mix of assets.

FCA’s key proposals in Consultation Paper CP18/17

  • Increase the support consumers have at three stages of their journey: before they access their pension, at-retirement and in drawdown.
  • Before a consumer accesses their pension, changes to the wake-up packs so that they reach consumers at the right time to inform their decision and are more useful to them. This includes incorporation of a one-page headline document in accessible language; risk warnings from age 50 onwards; and sending the packs every five years until the customer accesses their pot.
  • At the point of entering drawdown or buying an annuity, providers should offer ready-made drawdown investment solutions; new consumers accessing drawdown must make an active choice to be in cash; and firms should have a strategy for dealing with consumers who have already been defaulted into cash.
  • Firms should provide a summary showing key information at the front of the key features illustration that consumers receive, including a one-year charge figure in pounds and pence.
  • Firms should make consumers aware of their eligibility for an enhanced annuity.
  • Once a consumer has entered drawdown, providers should send information to their customers in drawdown annually and remind them of their chosen investment pathway as well as their ability to switch annually.
  • Work closely with the Money Advice Service and the Association of British Insurers to develop a drawdown comparison tool.

The aim of all these reforms is to protect consumers from poor outcomes, improve consumer engagement with retirement income decisions and promote competition by making the costs of drawdown clearer and comparisons easier.

The consultation is running throughout the summer until 6 September, with a policy statement expected in the first quarter of next year.
But some fear that the FCA has yet to deliver the knockout blow it needs to stop more bad retirement decisions in the pension freedoms era.



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

  1. I find the reference to the battle of Arnhem operation market garden etc at the beginning totally inappropriate and insensitive and totally disrespectful for those who died and those who lost loved ones many of whom are still living today and dealing with pension freedoms
    sorry but no ones life is at stake in the pension freedom battle

  2. David Cathcart 5th July 2018 at 10:26 am

    I don’t see any provision in these proposals for individuals to have to seek professional advice. I have no issue with individuals not taking regulated advice and allowing the insurers free reign over the consumers retirement options, but then the individual should not then be allowed to seek redress when it all goes pear shaped and given previous history it inevitably will.
    Finally will the regulators force the insurers to go through a cash flow forecast with the consumer before allowing them access to draw down – I think we know the answer to that one

  3. I also don’t see anything in here that will make it easier, quicker and less complicated for an adviser to provide simple advice on taking tax free cash only. That would have been a good idea to have included in this.

  4. IMO ‘wake up’ packs remind the client they can take a tax free lump sum, why dont they send an encouragement pack as such highlighting the advantages of investing more

  5. Default strategies on retirement are probably a step in the right direction. The rest is a reversion to the FCA’s default strategy of providing consumers with more information in the, somewhat vain, hope it will remedy the situation. It won’t, it’s window dressing, avoiding the real issue, taking the easy path, looking good but lacking substance, whatever you want to call it.

    The sad fact is that 90% of consumers lack either the commitment, ability or interest to engage at the level needed to make informed decisions. When it comes to complex areas twas ever thus and ever will be.

    What’s the answer then? Two possibilities. Firstly, simplify pensions. Not in a ‘make it simple by adding more layers of complication’ way but by making it truly simple for new and existing non-DB pensions, period. Like a no frills, no complications pension ISA.

    Secondly, change regulation to make advice simple and easy to provide at a reasonable cost, i.e. make it possible to buy a Ford or a SEAT or a Renault instead of insisting everyone drive round in a BMW, Mercedes or Lexus. You do not help people by denying them access to advice.

    I suspect politics and a lack of imagination and willingness to take risks for the greater good will mean we retain a failed system where no one takes responsibility and few benefit.

  6. David Leuchars 5th July 2018 at 4:28 pm

    What a bizarre and out of place opening paragraph, what is that even there for?

  7. Not a failure for advisers, not a failure for fund managers, nor the Revenue or the platforms. But a potential disaster for the poor old clients – unless they have a pension fund north of £500k and assets elsewhere in addition.

  8. Julian Stevens 13th July 2018 at 4:02 pm

    Might it not be a good idea for the powers that be to mandate regulated advice on IDD for anyone whose pension pot is worth more than £30K?

  9. […] Finally, Bailey reiterates the FCA opinion that a charge cap on drawdown is not to be considered just now. However, he intends to review charges in the light of how they develop as part of its work from the retirement outcomes review. […]

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