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Review could cause consumer confusion and difficulties for the SIPP sector

11 September 2018

The final report on the Retirement Outcomes Review (ROR) could cause consumer confusion and difficulties for the SIPP sector, warns Elaine Turtle, director, DP Pensions

This summer the Financial Conduct Authority (FCA) published it’s final report on the Retirement Outcomes Review (MS16/1.3) in response to July 2017’s Interim Report MS16/1.2. Accompanying the final report was consultation paper CP18/17 and an Occasional Paper 38 which providing some behavioural insights into how consumers interact with wake-up packs as they approach retirement.

The final report throws up some interesting ideas with the overarching aim of seeking to improve the experience of non-advised consumers. There seems to have been widespread support for the proposals which would apply to the whole of the retirement sector but there are some areas that could cause difficulties for the SIPP sector.

The remedy package aims to:

1) Protect consumers from poor outcomes,

2) Improve consumer engagement with retirement income decisions and

3) Promote competition by making the costs of drawdown clearer and comparisons easier

Before we discuss these difficulties let’s look at some of the proposals.

Wake up packs

A change to the wake up pack is planned. A new one page ‘headline’ document is to be produced and sent earlier in the process. The pack will be sent from age 50 and every 5 years thereafter. What is interesting is whether such a change to the process will realistically engage consumers with their pensions without running the risk of them considering early withdrawal which could be detrimental in many cases. The occasional paper discusses different approaches to highlighting the Pension Wise service with the greatest engagement coming where an appointment is essentially ‘reserved’ for the consumer. That said, the increase in engagement only rose from 5% to 12%.

Investment pathways

The final report confirms that a number of investment pathways should be made available to non-advised customers at the point that they access drawdown. These will be based on different time horizons. This proposal reinforces the FCA’s view that cash is not a suitable investment for consumers although it is perhaps more accurate to say that the FCA wants consumers to actively select cash rather than it being used as a default mechanism.

This proposal comes off the back of data showing that SIPP customers appear to be more engaged with their investment decisions, 77% knowing where they are invested compared to 29% of life insurance customers.

Whilst on the face of it such a proposal could be seen as welcome, it isn’t clear whether by creating an investment pathway it is truly suitable for the consumer or whether it will always remain suitable for the consumer.

One of the concerns we know firms have is the ability of SIPP operator firms to create investment pathways and monitor their effectiveness, structure and performance. That’s even without addressing the concern that they will not have the regulatory investments permissions to even make a start. Clearly not an issue for life insurers or investment manager firms offering SIPPs.


One of the encouraging areas in the review will be the requirement for further transparency around costs. The proposal is for costs to be presented in pounds and pence rather than as a percentage which should aid price comparisons.

The paper recommends a charge cap of 0.75% to bring it in line with the experience on workplace pensions however there has been no analysis of whether such a charge is reasonable given the extra flexibility and choices that a full SIPP can provide to customers. To manage a charge cap where investment pathways are required as highlighted above, could be very challenging indeed.

However, FCAdid find that by switching from a higher cost provider to a lower cost provider, consumers could increase the annual income from their pot by 13%. For an individual with a pot of £100,000, the FCA analysis showed that this would be an extra £648 a year on top of an income of £4,922.

Importantly though, this is against a backdrop of the average pot size in drawdown being £80,000. Over half of all pots accessed were fully withdrawn and nearly 90% of those fully withdrawn were under £30,000.

‘De-coupling’ tax free cash from other pension decisions

One of the more surprising concepts coming from the FCA is a view on de-coupling tax free cash from the retirement process.

The FCA is keen to persuade the Government to change the pension framework so that the decision to take tax free cash can be made without consideration of the remaining drawdown pot. The analysis carried out by the FCA suggests many consumers do not consider the ongoing investment strategy and make a decision about tax free cash in isolation.

This view appears to be borne from a belief that drawdown itself is a product in its own right. This may be true in an insurance company pension, however for most providers and certainly within the SIPP operator community, a drawdown option comes hand in hand as part of the regular SIPP offering. There is no separate product or plan established just to cater for drawdown.

Whilst customers may well make a decision to take tax free cash as a stand-alone transaction, it is unlikely that they are ignoring their investments. After all, a client won’t be encashing their existing portfolio to ‘move’ assets into drawdown. They are at most only encashing assets to cover the tax free cash entitlement and allowing their investments to continue as before. The more pressing issue would be for customers to ensure that when they come to take income they structure their portfolio in such a way that provides a suitable mix of growth and income producing stocks.

In summary, the proposals coming from the Retirement Outcomes Review final report could end up causing further consumer confusion where simplicity is really required. Feedback from clients and advisers alike already suggests customers are overwhelmed by choice and volume of paperwork arising from regulatory change. Hopefully any final outcomes strike the right balance to all concerned.

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