The Financial Conduct Authority (FCA) has launched a consultation on a package of measures designed to protect consumers, improve engagement and promote competition in the retirement income market. Alongside the consultation, the FCA has published the final report of its Retirement Outcomes Review, an investigation into how the pensions and retirement income sector has been working since the pension freedoms were introduced in 2015.
The FCA launched the Retirement Outcomes Review in June 2016 to assess how the contract-based defined contribution market is evolving. It published an interim report in July 2017.
Its final report, published on 28 June 2018, stresses that while many consumers have welcomed the pension freedoms, the trend of individuals moving away from annuities towards drawdown products without taking independent financial advice means that further consumer support and protection is needed. Key findings from the report include:
- around one in three consumers who have gone into drawdown recently were unaware of where their money was invested
- a third of consumers were wholly invested in cash with around half of these likely to be losing out on income in retirement
- some providers were ‘defaulting’ consumers into cash or cash-like assets
- weak competitive pressure and low levels of switching in the non-advised drawdown market might lead to consumers paying too much in charges
- charges vary considerably from 0.4% to 1.6% between providers and can be complex, opaque and hard to compare.
To combat these perceived weaknesses in how the market operates, the FCA has launched a consultation on a package of measures to help consumers at key points when they make decisions about what to do with their pension pot. This sits alongside a proposal to provide ongoing support to consumers once they have accessed their pension savings. The proposed package of changes also includes improvements to the clarity and timings of communications prior to people making decisions about what to do with their pension pot, simplifying the options that people have, and the ongoing communications they receive.
Talking about pension choices earlier
The FCA is proposing that ‘wake-up’ packs should be sent to customers from the age of 50 and then every five years until the customers have fully accessed their pension pots. The new ‘wake-up’ packs will have to include a single page summary, sometimes called a ‘pensions passport’, and firms will also have to include specific retirement risk warnings.
Measures designed to help consumers when they access their pot through drawdown
The FCA is consulting on the introduction of investment pathways for customers at the point of entering drawdown. It proposes three ready-made investment pathways based on the individual's desired outcome at retirement, namely:
- I want my money to provide an income in retirement
- I want to take all my money over a short period of time
- I want to keep my money invested for a long period of time and may want to dip into it occasionally.
The FCA believes that a more structured set of options would help consumers to engage with the decisions they are making, consider what their retirement objectives are and ultimately end up with a more appropriate investment solution. It also believes that firms should ensure that consumers make an active choice to be invested in cash.
To help consumers compare costs and drive good value for money in drawdown options, the FCA is proposing that firms include a one-year charge figure in pounds and pence in the key features illustration they provide to consumers.
If firms fail to introduce investment pathways with appropriate charge levels, the FCA has not ruled out introducing a cap on drawdown charges.
Measures designed to help consumers after accessing their pot
The FCA is proposing that all consumers who have accessed their pension pot should receive information from their provider annually, whether or not they are currently drawing an income from their pot. The FCA also believes that this information should include the actual charges paid in pounds and pence.
The FCA's consultation on the package of measures designed to protect consumers, improve engagement and promote competition in the retirement income market closes on 6 September 2018. The FCA will then aim to publish finalised Handbook text in a Policy Statement in January 2019.
For the proposals requiring further work, such as the investment pathways, the FCA is seeking views before finalising its approach and is requesting responses by 9 August 2018. It intends to consult on these proposals in January 2019.