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FCA Retirement Outcomes Review gives regulator “early view of areas to keep a close eye on”

12 July 2017

The FCA’s Retirement Outcomes Review was set up to identify how the retirement income market has changed since the introduction of the pensions freedoms in 2015.

The review states that over one million defined contribution (DC) pots have been accessed since the reforms to the pensions rules, of which 72% have been accessed by consumers under 65, with most choosing to take lump sums rather than a regular income.

Over half (53%) of pots accessed have been fully withdrawn but 90% of those pots were small, below £30,000, and 94% of consumers making full withdrawals had other sources of retirement income in addition to the state pension, primarily defined benefit (DB) pensions or other DC schemes.

Drawdown has become more popular with twice as many pots moving into drawdown than annuities.

The review identified five main issues:

1. Over half (52%) of fully withdrawn pots were not spent but were moved into other savings (32%)or investments (20%). Some of this is due to a lack of public trust in pensions – typically based on negative media coverage of the broader pensions sector and the perception that the rules were constantly changing and to their detriment. These moves could result in consumers paying too much tax, missing out on investment growth or losing out on other benefits.

2. Consumers who access their pots early without taking advice typically follow the ‘path of least resistance’, accepting drawdown from their current pension provider without shopping around. The review also noted that there are no market wide drawdown comparison tools and that consumers who don’t take advice also don’t tend to engage or shop around there is limited incentive for providers to compete.

3. Consumers are increasingly accessing drawdown without taking advice. Before the freedoms, 5% of drawdown was bought without advice compared to 30% now. Since drawdown is complex, these consumers may need more support and protection, particularly as they risk making poor choices that could see investment into assets that are too risky for them, or running out of money sooner than expected.

4. Providers are continuing to withdraw from the open annuity market which could bring a risk of weakened competition over time.

5. Product innovation has been limited to date, particularly for the mass market. If competition is not working effectively and consumers make uninformed retirement income decisions this could lead to different types of harm, such as:
– paying more in charges and/or tax
– choosing unsuitable investment strategies
– missing out on valuable benefits (e.g. employer pension contributions) or investment growth
– running out of pensions savings sooner than expected.

However, the Regulator said it recognised that the main barriers to innovation are the pace of policy change, uncertainty about how the market may develop in the future, consumer inertia and the fact that most DC pots are currently relatively small. It added that it believed incentives for innovating will increase over time as consumer DC pots grow in size.

Potential remedies

In order to address some of these issues the FCA has suggested a number of “remedies”:

• gathering further evidence on consumer outcomes to assess whether additional protections should be put in place for consumers who buy drawdown without advice. The Regulator intends gathering evidence on whether consumers pay high charges and have ended up with unsuitable investment strategies. Suggestions include default investment pathways for consumers who do not or cannot engage with investment decisions as well as charge caps.

• improving competition in non-advised drawdown by:
– asking Government to consider proposals to enable consumers to access their savings early without having to make a decision about the remainder of their pot.
– proposals to make it easier to compare and shop around for drawdown.

• tools and services to help consumers understand their options after the pension freedoms and improve trust in pensions, primarily by building on existing initiatives such as the free guidance provided by Pension Wise.

The FCA will be holding events to get stakeholders’ views and is inviting feedback on the initial findings and recommendations, with a deadline of 15 September 2017. The Regulator aims to publish a final report in the first half of 2018.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA, said the review gave the Regulator “an early view of areas to keep a close eye on”.

“We have identified areas where early intervention may be needed either now or further down the track to put the market on the best footing for the future. Ensuring this market works well will require cooperation across Government, regulators, the industry and consumer bodies.

“We will work closely with stakeholders to make sure we are clear on the actions we are best placed to lead.”

Industry reaction

Tom Selby, senior analyst at AJ Bell, said it appeared the regulator was not as comfortable as Government in respect of the concept of freedom and choice in pensions. And was having to “play catch up” with the market.

“The FCA’s findings suggest the vast majority of savers are using the pension freedoms sensibly and the market is working well for consumers. It is therefore puzzling to see the regulator float a series of market interventions, including ‘default’ funds for drawdown and charge caps,” Selby said.

“While it is right to place focus on savers shopping around the retirement income market, the review fails to acknowledge the fundamental difference between annuities and drawdown. Indeed, it even refers to people ‘buying’ drawdown, when for most people entering drawdown is a relatively seamless continuation of pension saving.

“If someone fails to shop around for an annuity and buys with their existing provider, there is no going back. The same is not true for drawdown, where customers can switch easily at any time. Savers should be reviewing their retirement strategy and platform provider regularly, rather than just at the point they enter drawdown.

“Allowing savers to access their tax-free cash without forcing them to pick a retirement income path seems sensible given that large numbers of people only want to get at this money initially. It would be particularly useful for members of schemes that do not currently offer drawdown and should reduce the risk of people rushing into a decision without considering the consequences.

“It is also positive to see the FCA beginning to shift its focus to engaging customers rather than bombarding them with information. At the moment providers and advisers are required to send reams of often horrifically complex documentation to savers which many will never read or understand. We need to review and radically simplify the communications that are sent to people, and consider new ways of presenting information that help savers make informed retirement decisions.”

Tim Gosling, Policy Lead: DC at the Pensions and Lifetime Savings Association, said the report made for “disturbing reading”.

He said: “Without timely action now, those retiring in the near future who are dependent on defined contribution (DC) pots and who have no access to advice will not receive the retirement they hope for.

“We need two things. First, we need a smoother customer journey at retirement that makes the line of least resistance an income product rather than cash. This may mean a form of “soft” default, intended to preserve consumer choice but designed to connect savers to the income 84% say they want1.

“Second, we need a new generation of high quality retirement income products. These need to have strong independent governance and be suitable for those needing an income but who do not have access to advice.” He added that Government and the FCA needed to ensure product quality and that “they are open to fresh thinking about how to stimulate the development of new products”.

In respect of the report suggesting there was a lack of public trust in pensions, he said, ”we need to work hard to address this issue by helping the industry to evolve to meet the expectations of consumers saving for and transitioning into retirement. The industry does not have long to get this right.”

Andrew Tully, pensions technical director, Retirement Advantage said while many experts thought having to pay income tax on withdrawals would prove to be a natural brake on people cashing in their pensions, this clearly wasn’t the case as consumers were “taking full advantage of grabbing the cash early”, a fact backed up by the government’s own stats on the additional tax take, “which by their own admission is way higher than they expected”.

Moving money from a tax-efficient pensions environment to place into other savings or investments “is frankly bonkers”, he added.

“For those people looking to generate an income, the market has swung towards drawdown, but the lack of shopping around pervades the market and is an issue whatever product you choose. We’ve highlighted people can lose £8,460 in income over the course of an average retirement by not getting advice and securing the best annuity for their circumstances. While drawdown is not a one-off purchase like an annuity, it is still important people look around for the right product, as you can easily find yourself caught out by high charges.

He flagged the company’s Retirement Account as “the only obvious highlight of product innovation since the pension freedoms”, combining guaranteed income and flexibility through drawdown.

“Seeking professional financial advice is key to ensure people not only buy the right product or combination of products, but also ensure their retirement plans remain on track,” he added.

Ken Davy, chairman of Simplybiz, was critical of the proposal that consumers will no longer need to seek advice on cashing in a pension pot of under £30,000 which has a guaranteed annuity rate (GAR), saying this important issue needed to be reconsidered by the Government and the FCA “without delay”.


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