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.