FCA investment pathway proposals welcomed, but concerns remain

The watchdog is consulting on the proposals it raised for discussion in the June 2018 final report from its Retirement Outcomes Review.

The challenge in devising a simple set of choices is that they may not fit a customer’s preferences or circumstances

Tom Selby, AJ Bell

An estimated 100,000 customers enter drawdown without taking advice each year. The FCA has said it wants to introduce investment pathways designed to help these savers choose from four objectives for their retirement pots.  

It has proposed that providers only have one investment solution for each investment pathway objective.

The regulator does not intend to prescribe the choice of architecture providers should use to present investment pathways, though it is consulting on some basic rule requirements.

For example, before a non-advised consumer selects a non-pathways investment, they must be given a second opportunity to use the investment pathways.

Simple set of choices may not meet preferences

“Our Retirement Outcomes Review identified that many consumers are focused only on taking their tax-free cash and take the ‘path of least resistance’ when entering drawdown. This can often mean the rest of their drawn down pension pot is not invested in a way that meets their needs and intentions,” said Christopher Woolard, executive director of strategy and competition at the FCA, in a statement.

The regulator found approximately one in three consumers who have gone into drawdown recently are unaware of where their money is being invested, leading to poor consumer outcomes.

“Our proposals on investment pathways will help non-advised drawdown consumers select from four relatively simple choices, designed to meet their broad retirement objectives so that they can maximise their income in retirement,” Mr Woolard added.

However, Tom Selby, senior analyst at AJ Bell, noted: “The challenge in devising a simple set of choices is that they may not fit a customer’s preferences or circumstances.”

For example, a saver who plans to cash out their entire fund in four years would ideally have a different asset allocation to someone who is cashing out in a week, he observed.  “However, under the FCA’s proposed solution the same investment pathway would be deemed suitable for both people.”

Mr Selby said a consumer planning to take 10 per cent a year through drawdown and someone taking 1 per cent a year could both be lumped into the same pathway.

“Furthermore, if a customer picks a pathway but then their circumstances change, they will need to review their investment choices to factor this in. The danger with investment pathways is that inertia is hard-wired in at exactly the moment people need to be engaging,” he added.

Similarly, Andrew Tully, technical director at Canada Life, noted that “you need something simple, but you also need it to do the job it’s meant to do”.

People are more likely to have the best outcome for their individual retirement objectives through seeking regulated financial advice, he argued.

Different risk appetites

There has been a significant shift towards taking drawdown without advice. The FCA found that twice as many pots have been used for drawdown than to buy an annuity. Thirty-two per cent of these were accessed without advice, compared with 5 per cent before the introduction of pension freedom and choice.

“We’ve obviously got this big issue with non-advised consumers, so compared with investing wholly in cash – which is one of the behaviours they’ve seen – this should be better than that. But it is still quite limited because it’s got five-year time horizons, so that won’t be suitable potentially for a lot of people,” Mr Tully said.

The FCA’s proposed ‘option one’ is for people who “have no plans to touch my money in the next five years”.

Mr Tully said even within that group, there are going to be a very wide range of customers.

“You could have someone who’s very risk averse in that situation, or you could have someone who’s maybe quite gung-ho in that situation, but that default isn’t necessarily going to suit both of them,” he said.

Smaller firms exempt

Smaller drawdown providers will be exempt from the requirement to offer investment pathways, and instead will be able to refer consumers to a drawdown comparator tool provided by the Single Financial Guidance Body.

“I was surprised and disappointed to see the FCA draw a fairly arbitrary line in the sand in deciding who should and shouldn’t offer investment pathways,” Mr Selby said.

“If the regulator believes pathways will improve retirement outcomes, it should require all drawdown providers to offer them, regardless of size,” he added.

As part of the consultation, the watchdog is seeking feedback on whether providers should be required to ensure consumers invest in cash only if they make an active decision to do so.

Furthermore, it is consulting on rules requiring companies to tell consumers each year how much in charges they had paid in that period – inclusive of transaction costs.

New wake-up pack rules

Alongside the consultation, the FCA also published a policy statement setting out its response to the feedback it received to a consultation paper released with the 2018 final report.

The new rules and guidance cover changes to make the cost of drawdown products clearer and more comparable, information provided to savers about annuities and eligibility for enhanced annuities, and retirement communications – including wake-up packs.

The watchdog is going ahead with proposals to include a wake-up pack at age 50, with a single-page summary document setting out key information.

“The FCA appears to be slowly waking up to the fact that sending savers shedloads of information in unreadable documents doesn’t achieve good retirement outcomes,” Mr Selby added.

Behavioural research points to a fairly straightforward conclusion – the simpler, the better.”