The Financial Conduct Authority (FCA) has started to change the way that people will be told about their pension options. In a recent market study paper, they lay out their final proposals on the information that should be delivered to people approaching retirement and how it should look and feel. During 2015, there will be a considerable amount of research and consultation undertaken by the FCA with a view to introducing the new rules in 2016. So what will provider retirement communications actually look like in the future? Here’s a brief summary of the five remedies outlined in the paper.
First off, they will include an annuity quotation comparison so that people can see what they could get on the open market compared with the provider’s rate with caveats about how those in ill health might benefit from enhanced annuities. While we think this is a step in the right direction, maybe including the names of the top providers instead of a generic figure would further encourage shopping around. Eventually, it’s hoped that drawdown comparison tools will also be developed to help people more closely match their needs with the right product or options.
The FCA identified that when information on retirement options is given to people, it can often be framed in such a way that discourages people from shopping around or encourages the purchase of a particular product from the current provider. As such, the wording of retirement information packs will be redesigned to push people firmly towards shopping around, guidance and advice. In addition, new rules of thumb will be considered to help people understand the long-term implications of their decisions. So someone who wants to take drawdown, for example, might be told how long their money might last if they take a certain level of income given a certain level of investment growth.
At the moment, it’s widely agreed that retirement information isn’t hitting the mark in a lot of cases. Some provider packs can be dozens of pages long and full of jargon. Starting in 2015, the FCA will conduct behavioural research with interested parties to establish when and how conveying retirement information to people can be most effective. It’s expected that the retirement packs of the future will be more concise, set out the options in a way that people understand and of course encourage people to shop around. In addition, the current Association of British Insurers (ABI) code of conduct on retirement choices will be translated into the FCA’s rules to ensure consistency of approach.
With automatic enrolment, we know that people will end up with several small stranded pots as they change jobs during their working lives. Automatic transfers will help tackle this problem but there is still a risk that people will lose track of their pensions, for example pre-automatic enrolment legacy contracts. So the FCA is proposing a ‘pensions dashboard’ so that people can log in to a portal and see all their pensions – including state pensions – in one place. This will mean that they can make more informed decisions. While there is widespread support for this remedy, this is perhaps the most challenging of them all. The costs and logistics of getting all pension providers’ systems to talk to each other for all their contracts – some of which may be decades old – will be considerable. As a result, this could take some time to build and operate effectively and so a timescale of ‘a few years’ is anticipated.
The new retirement options available to people will make it more important than ever to make sure the market works properly for consumers. The FCA is introducing new monitoring processes with a view to preventing market failure. This will include, for example, gathering information on product sales by type and channel, the number of defined benefit transfers and the amount of people giving up guarantees in favour of freedom. The FCA will also conduct further research with consumers, continue to monitor the Pension Wise service and work with the Pensions Regulator towards a joined-up approach to market monitoring and reporting.
The hope is that, in the future, retirement packs will better provide people with the information they need to make informed, risk-managed decisions. This won’t work all the time and there will still be a considerable demand for advice. Because as the ABI points out, “…human behaviour is complex, hard to predict and hugely dependent on context” 1.
1 Association of British Insurers ‘Freedom and Choice in Pensions: A Behavioural Perspective’