What have we learnt from the FCA's Retirement Outcomes Review?

It is the first comprehensive analysis into how the UK does later-life income in a post-pension freedoms world. 

On the front foot

The final report and the consultation paper together total around 200 pages, but the central message comes across loud and clear: although it is early days, the FCA wants to get on the front foot in protecting consumers as they make one of the most important and challenging financial decisions of their lives.

The suggested remedies are comprehensive and will undoubtedly ignite some heated debates, particularly around the design of investment pathways

The data for the review were collected in part through the FCA’s Financial Lives survey – based on 13,000 people – and its retirement income market data and a specific provider information request. 

So, what have we learnt?  Of pension pots accessed since October 2015, 55 per cent have been full withdrawals of small cash pots; annuity purchase is decreasing and use of drawdown is increasing.

In general, those taking cash have done so for sensible reasons and have other sources of retirement income, for example from DB pensions. Those taking annuities are still not shopping around as much as the FCA would like, and they might benefit from being offered enhanced rates. So far, so good. 

Drawdown concerns

Drawdown is where the majority of the review’s focus and concern lies. It is a complicated product involving many challenging, interrelated decisions. What is an appropriate investment strategy? What is a sensible withdrawal rate? How long am I going to live? How might the answers to these questions change over time? 

Between October 2015 and September 2017, nearly 350,000 pension pots went into drawdown, and almost a third of these did so without the benefit of any financial advice.

Of the people who have gone into drawdown without taking advice, there are two trends that are particularly concerning. First, there is not much shopping around, and people might not be getting the best drawdown service, ie they might be paying too much. 

Second, of this population, a third have all their money invested in cash, which over the medium to long term is unlikely to deliver sufficient levels of income. 

In line with best practice

By my own calculation, around £30bn has gone into drawdown over the period, of which around £10bn was unadvised. That means more than £3bn is sat in cash, generating little or no income (negative income after inflation). 

In the final report, the FCA states that people could increase the level of income they receive by 37 per cent by adopting a more appropriate investment mix. And, as we are still very much still in the foothills in this shift to DC and drawdown, these numbers will only increase.

The remedies that the FCA is considering can be broken down into three main areas. Only some of these are actually being consulted on at this time: 

• Improvements to member engagement (including earlier and more frequent wake-up letters, annual reminders post-drawdown, more transparency around charges).

• Introduction of pre-determined investment pathways that target specific retirement objectives, plus banning investment solely in cash.

• Better governance (extending the remit of independent governance committees to post-retirement products and imposing independent governance on standalone SIPP providers).

This is a significant package of measures that would fundamentally alter the retirement landscape, but in many ways it is simply bringing this part of the financial services industry more in line with what is now regarded as best practice in the accumulation phase. 

Regulation must keep pace

The risks to customers of making poorly informed decisions at retirement are arguably greater and more varied than during their earlier years, so it is right that regulations keep pace with the evolving nature of people’s later life finances.

In summary, the Retirement Outcomes Review presents a fascinating early glimpse into the behaviours of individuals after the introduction of pension freedoms.

Fears about retirees having to sleep in newly purchased Lamborghinis appear premature. The suggested remedies are comprehensive and will undoubtedly ignite some heated debates, particularly around the design of investment pathways, but they are a step in the right direction.

Jon Parker is director of DC and financial wellbeing consulting at Redington