The Financial Conduct Authority will prioritise retirement income provision within pensions in 2017-18, addressing perceived problems with consumers who do not take regulated financial advice, as some argue schemes should organise Pension Wise sessions by default.
The watchdog made the commitment as part of its business plan for the next year, targeting increased access to advice, guidance and information for savers deciding what to do in retirement.
Industry figures welcomed the statement, but said improving the choices made by savers at retirement will also depend on factors out of the regulator’s reach.
The FCA also noted that preserving industry competition would be vital to any effort to improve decisions at retirement. In its 2017 sector views, published alongside its business plan and mission statement, it concluded that post pension freedoms, “firms may focus on customer retention at the expense of product innovation”.
Let’s just put in place as a minimum that everyone gets a Pension Wise session, because there’s nothing to lose apart from 40 minutes of your time
Stephen Lowe, Just
However, its business plan also focused on addressing consumer reluctance to take advice when considering retirement provision.
“Consumers cannot or do not want to get adequate advice and guidance to make the best choices for saving for, and funding, their retirement,” it read.
This problem was compounded by complex product descriptions and cost structures, making it harder for non-advised consumers to shop around, the watchdog found.
The right response
In response to these issues, the FCA is undertaking a review of retirement outcomes. The interim report is due to be published this summer, followed by a final report in early 2018.
Andy Cheseldine, partner in LCP’s defined contribution practice, welcomed the FCA’s goals, particularly where they aim to address the behavioural biases present in many non-advised consumers.
“Consumers aren’t rational economist-type people – they make decisions based on what’s easy and what looks about right,” he said.
Cheseldine said the FCA would have some difficulty accessing all DC consumers, owing to the large proportion of assets in trust-based, primarily mastertrust, schemes, which fall into the Pensions Regulator's remit.
And he said some of the work needed to improve savers’ decisions at retirement had already been done by government with the introduction of the pensions advice allowance, alongside tax breaks for employer-arranged financial advice.
What can schemes do?
Where members prove more obstinate about not taking financial advice, employers and schemes may have a role in communicating the options to members.
“You can do a whole lot of stuff that’s not regulated advice and you can do that fairly cheaply,” said Cheseldine, explaining that while the impetus for guidance provision should come from employers, trustees may be a “useful conduit”.
However, while it might be simple to warn members about the dangers of taking their pot as a lump sum, the added complexity of drawdown arrangements would be more difficult for schemes to navigate, he said.
Opposition to manager duty of care
Elsewhere in its document release, the FCA also published a list of responses to its 2017 mission statement consultation, which included questions on giving a duty of care to investment managers.
The consultation question stemmed from the watchdog’s asset management market review, the final report of which will be published later this year. The interim report revealed significant conflicts of interest in both asset management and investment consultancy.
However, several industry bodies, including the Investment Association and the Institute and Faculty of Actuaries, voiced concerns about the duty of care measure.
For even the largest schemes in the UK, the answer so far has been to direct members towards government-led resources.
“We’ve updated our consolidation glide path to reflect the new circumstances [since the pensions freedoms] and we signpost members to Pension Wise,” said Mark Fawcett, chief investment officer at government-backed mastertrust Nest.
A proprietary drawdown service was mooted for Nest, but the government plan was halted amid widespread industry criticism.
“In the short term, our member pots are going to remain very small and most members will take them as cash. However, we do need more sustainable solutions for our members in the medium term, and we’ll be watching very closely to see how the market evolves,” said Fawcett.
Government boost needed
For now at least, encouraging members to seek advice and guidance may be the best boost to their ability to shop around in the retirement income market.
One-stop guidance shop to replace MAS, TPAS and Pension Wise
Financial guidance resources the Money Advice Service, The Pensions Advisory Service and Pension Wise will be replaced by a single body, the Treasury and the Department for Work and Pensions said in October last year.
Stephen Lowe, group communications director at provider Just, welcomed the FCA’s commitment to dealing with the “overnight explosion” of non-advised drawdown in the wake of freedom and choice.
He said government could strengthen support at retirement by requiring schemes to organise a Pension Wise session by default for anyone accessing their benefits.
“Let’s just put in place as a minimum that everyone gets a Pension Wise session, because there’s nothing to lose apart from 40 minutes of your time,” he said.
