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FCA Retirement Review pinpoints remedies for key consumer issues

31 January 2019

Four years on from the pension freedoms, the FCA has published its Retirement Outcomes Review policy statement, introducing a set of remedies designed to protect consumers and help them make better choices before accessing their pension savings and throughout their retirement.

The rules, which will be implemented by 1 November, include changes to ‘wake-up’ packs, increased awareness around eligibility for enhanced annuities and greater clarity around charges.

Steve Webb, director of policy at Royal London, said: “The big outstanding challenge around pension freedoms is not people with large pots blowing the lot on a sports car, but is about more inexperienced investors with smaller pots leaving them invested in cash for long periods of time or withdrawing them altogether.

“These FCA rules are a sensible response to the risk of savers sleepwalking into seeing their hard-earned savings eroded by sitting in low-return cash investments. But there is still a problem where people cash out the whole pot. It is clear that reckless caution, not Lamborghinis, is the big outstanding challenge with pension freedoms.”

Wake-up packs

The FCA has said wake-up packs should be reformed to comprise a single-page summary document to prevent an overload of information inadvertently increasing consumer confusion. In addition, to make the packs more effective, the FCA has said they should be sent to consumers at age 50 and include a Money Advice Service factsheet and other information deemed to help consumers make informed decisions. However, firms are banned from including marketing material in the pack.

Steven Cameron, pensions director at Aegon, said the pension freedoms could lead to individuals picking the wrong type of retirement product without the help of an adviser.

He said: “Starting to ‘wake people up’ to their retirement options through concise communications from age 50 is good news. There are real risks that those not seeking advice will invest in a fund which is inappropriate for their retirement objectives.”

Jon Greer, head of retirement policy at Quilter, commented: “Engagement is at the heart of issues across retirement policy. Standardisation of timing and content of wakeup packs is a solid step to boost people’s engagement, but it is important that this actually spurs people into action rather than becoming yet another piece of paper that consumers skim read and then bin.”

Eligibility for enhanced annuities

The FCA has pledged to make consumers more aware of enhanced annuities and to encourage them to shop around for a better deal. It follows findings from the FCA’s previous Thematic Review, which showed that 39-49% of consumers who bought a standard annuity may have been eligible to buy an enhanced annuity.

However, the watchdog stopped short of providing firms with a set of questions to ask consumers to establish their eligibility, stating it will instead set out a number of major health and lifestyle areas that firms may consider asking questions on.

Commenting on this aspect, Andrew Tully, technical director at Canada Life, said: “Around 70% of consumers should qualify for a better income because of health or lifestyle factors, so the change to annuity prompts requiring firms to ask more relevant questions to generate a competitive quote is a positive development.”

Charges

The policy paper also has sought to promote competition by making the cost of drawdown products clearer and comparisons easier.

Following its consultation, the FCA has concluded that a Key Features Illustration should include a one-year single charge figure in pounds and pence within the summary and be given to consumers who are using an existing contract to move funds into drawdown or taking an income for the first time, including uncrystallised funds pension lump sum payments.

Tully commented: “Drawdown charges can be opaque, complex and often difficult to compare. Clearly drawdown is not a one-off purchase, so people can switch, but the evidence shows people are unlikely to do so. It will be interesting to see how the introduction of an annual pounds and pence charge figure changes behaviour.”

He added: “The drawdown comparison tool has merit, but the challenge here is the complexity and to get a proper comparison will require many input fields which the average person is unlikely to complete.”

Alongside the policy paper, the regulator also published a further consultation paper seeking views on investment pathways and other rules and guidance for non-advised drawdown customers.

Under the FCA’s proposals, the number of investment pathway objectives will be increased from three to four, with a corresponding investment solution for each objective.

The options are:

  • I have no plans to touch my money in the next 5 years;
  • I plan to use my money to set up a guaranteed income within the next 5 years;
  • I plan to start taking my money as a long-term income within the next 5 years; and
  • I plan to take out all my money within the next 5 years.

However, Tully warned that “ready-made drawdown investment solutions will be like the ready-meals of retirement.”

He explains: “They are unlikely to satisfy for long and certainly won’t be winning any Michelin stars. There will be in-built limitations around risk to be appropriate for the widest range of consumers with fairly straightforward needs. Most people will want a perfect outcome for their individual retirement objectives and this is far more likely to be delivered through seeking proper regulated financial advice.”

Greer echoed the sentiment: “The risk around investment pathways is it becomes the path of least resistance and people go for a default instead of engaging. When they come in they will need to be positioned carefully to ensure we quash any misconception that it doesn’t require the customer’s ongoing input.”

Cameron said asking consumers questions and setting out a broadly suitable investment pathway will be of help to some and will reduce the number defaulting into cash, but warned that the industry must be careful not to give customers “the false impression” that simplified investment pathways replace the benefits of advice.

“For many, it will be hugely beneficial to seek advice on when to retire, where to invest, how much to withdraw taking into account life expectancy and steps to take to avoid paying extra income tax unnecessarily,” he added.