Viewing drawdown as a product risks creating poor consumer outcomes
25 October 2017
Responding to the FCA’s retirement outcomes review, Tom Selby, senior analyst at AJ Bell, argues that there are risks in regulation addressing drawdown as it would an annuity.
The rushed nature of the pension freedoms announcement in 2014 meant there was always going to be a certain amount of regulatory catch-up. As the dust settles on the reforms and data begins to emerge on consumer behaviour, it makes sense to consider any emerging issues that could lead to savers losing out.
The FCA is right to focus on shopping around as it reviews how the pension freedoms operate. There is a particular risk in the workplace retirement market, where savers are automatically placed into a scheme and may never have engaged with their pension before they enter drawdown.
It is here where default pathways and charge caps could be necessary, although any measures should not restrict those who have made an active choice to save with a particular pension provider and adopt a specific investment strategy. It would be wholly inappropriate to force these investors into a default investment pathway whether they are advised or self-directed.
It’s also important any future interventions recognise the fundamental difference between drawdown – now the preferred retirement route for most savers – and annuities.
Within the retirement market, one of the few places where drawdown is genuinely viewed as a product, rather than more reasonably being seen as a feature of a product, is in the FCA’s rules. This is understandable given the market was historically one where most people bought an annuity.
But entering drawdown and annuitising are fundamentally different. While buying an annuity is a ‘one and done’, irreversible decision, for most people the move into drawdown changes little in terms of charges, investment options or the service they receive. Our research shows that less than a quarter of people make any changes to their investment strategy when they enter drawdown and only 5% make significant changes. (See survey results below)
It is questionable, therefore, whether it remains appropriate to regulate drawdown on the basis that it is a product. We believe it would benefit consumers if the FCA’s framework governing drawdown regulated it as consumers see it – as a product feature rather than a product itself.
A large chunk of those who enter drawdown do so simply to access their tax-free cash, so you wouldn’t necessarily expect to see large volumes of shopping around at this point. Indeed, savers can switch provider at any point either before or after they enter drawdown, creating a competitive tension that simply doesn’t exist in the annuities market.
Any changes to existing regulation should therefore be made on the basis of switching figures throughout a person’s retirement journey, rather than simply focusing on the point at which someone moves into drawdown.
Consumer survey: Has your investment strategy changed since you started taking income drawdown?
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