The Financial Conduct Authority (FCA) has issued its final report of the Retirement Outcomes Review, its in-depth study of how the pensions marketplace has operated since the introduction of the pension freedoms in 2015. The findings of the Review have prompted the regulator to open a consultation into a series of new proposals, which include a requirement for providers to send ‘wake up’ packs every five years, and to provide clearer information once an individual customer has started accessing their retirement savings.
In the main, the proposals are designed to assist consumers who do not seek professional advice. Here the FCA is perhaps taking it for granted that clients of financial advisers will already receive extensive support regarding their retirement income options.
The report recognises that drawdown is a complex product but notes that many people are choosing to enter drawdown without taking professional advice. 32% of those entering drawdown now do so without advice, whereas the equivalent figure prior to the introduction of the freedoms was just 5%.
Whereas in the past there was concern about people who automatically accepted the annuity on offer from their pension provider, now the FCA comments that many people are taking “the path of least resistance” and entering into drawdown with their existing provider. This ‘path’ was taken by 94% of those who accessed their pots without taking advice.
Once in a drawdown plan, the regulator is concerned about the investment choices that some pensioners are making. It notes that some individuals could have increased their retirement income by as much as 37% had they invested the monies, rather than simply leaving them in cash funds. 33% of non-advised drawdown customers had their entire holding in cash – a similar proportion to those which had no idea where their money was invested.
In response to these findings, the FCA has commenced a consultation on a series of proposed remedies.
One of the proposed new rules is for providers to be required to send ‘wake-up’ packs to every pension customer. The first such pack would be sent when the customer reaches age 50, and a similar pack should continue to be sent every five years until such time as they have fully accessed their retirement savings. These packs will include a one-page summary document – which will include:
- The individual’s contribution rate
- The fund value
- Whether guarantees or other special features apply to the plan
- A statement asking the individual to consider whether they are saving enough
- A statement about the availability of pensions guidance.
A series of relevant risk warnings will also be included in the wake up pack, and firms will not be permitted to send any marketing material alongside the pack.
The FCA is also taking steps to ensure consumers are better informed at the time they choose to access their pension pots. The ‘investment pathways’ proposals would require providers to set out three investment solutions that the customer could make use of upon entering drawdown. These pathways should include one solution for each of the following three strategies:
- Accessing the entire pension pot over a short period
- Using the pot to provide a regular retirement income
- Keeping the money invested, and maybe accessing it occasionally over time
Customers should only end up being invested in cash if they have made an ‘active decision’ to do so.
Drawdown customers will also receive an annual statement – there is currently no requirement for providers to do this. This document must state the charges levied by the provider in cash terms, rather than as a percentage.
If a customer is considering an annuity, then the proposed new rules will also require the provider to ask them a series of questions regarding their health and lifestyle, to establish whether they could be eligible for an enhanced annuity. Providers will also need to provide information on the best quote that is available in the open market.
The consultation closes on September 6 2018.
The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article