The Financial Conduct Authority’s final report for its Retirement Outcomes Review focused on the challenges facing drawdown consumers.
The regulator recommended the provision of single-page ‘wake-up’ packs to members when they turn 50.
The FCA also raised concerns over the widespread holding of unadvised pots in cash, suggesting the introduction of three default investment pathways for drawdown.
That they’re in cash is a bad thing, but actually there’s no reason why they shouldn’t necessarily just be continuing with their accumulation strategy
Nathan Long, Hargreaves Lansdown
However, the watchdog stopped short of introducing a charge cap for drawdown investment pathways.
It instead called upon providers to “challenge themselves on the level of charges and use 0.75 per cent on default arrangements in accumulation as a point of reference”, and said the option of capping charges “remains open”.
No charge cap – for now
The watchdog said it would review these pathways, including the charges linked to them, one year after their introduction.
“If at that point we find evidence that firms are charging excessively, we will be highly likely to move towards a cap,” the consultation noted.
Daniela Silcock, head of policy research at the Pensions Policy Institute, supported the FCA’s decision to withhold a charge cap.
“If a cap is artificially made that doesn’t actually reflect the business that a particular organisation is doing,” she said in a Pensions Expert podcast, adding that “they might then make cuts which stifle returns or reduce the level of communication”.
Nathan Long, senior pension analyst at Hargreaves Lansdown, highlighted the risks of limiting charges on drawdown products.
With a charge cap, “you kind of push everyone down towards a particular route of investment”, he said. At 0.75 per cent, this route would most likely be passively-managed, he noted.
Long added:“If you push too many people down the route of passive management we have the risk that… people are eating into capital to deliver their returns, and if we get a big stock market correction that’s where potentially you’ve got people eating into their pot.”
The review noted that a number of providers are currently defaulting their customers into cash or ‘cash-like’ assets, with 33 per cent of non-advised drawdown consumers only holding cash.
Long said that instead of taking decisions specifically related to their retirement income, consumers are engaging in the practice of “decision deferral”.
FCA recommends investment pathways for drawdown
The Financial Conduct Authority has proposed that pension providers are required to develop three ready-made investment pathways to help confused drawdown customers, but has shied away from imposing a charge cap on the products.
These include savers who go into drawdown to take their lump sum, who will then begin to think about how they will take their retirement income.
“If you’ve got half of people going into drawdown that aren’t drawing income, basically those people are just carrying on investing,” Long said.
“The fact that they’re in cash is a bad thing, but actually there’s no reason why they shouldn’t necessarily just be continuing with their accumulation strategy.”
The podcast will be available on iTunes and pensions-expert.com from July 12.
