The FCA has published the retirement outcomes review interim report which looks into how the retirement income market is evolving after the introductions of the pension freedoms.
The report concludes that consumers have welcomed the pension freedoms with accessing pensions early becoming the norm and over half of pots being accessed have been fully withdrawn, although many of these are small and the clear majority using this option (94%) had other sources of retirement income.
The market is still evolving and although providers have developed tools to help consumers understand the changes and have provided simpler flexi-access drawdown products, the market still has a lot to do. The defined contribution market will continue to grow and will become a greater proportion of benefits for those retiring in future years because of the decline of defined benefit schemes and the increase in auto enrolment.
Drawdown has become significantly more popular since the introduction of the pension freedoms with twice as many pots moving into drawdown compared to annuities. A significant change in comparison to before the freedoms.
The FCA has identified five emerging issues:
• Consumers who fully withdrew their pots did so partly because they do not trust pensions;
• Most consumers chose the ‘path of least resistance’, accepting drawdown from their current pension provider without shopping around;
• Many consumers buy drawdown without advice but may need further protection to manage their drawdown effectively;
• Annuity providers are leaving the open annuity market; and
• Product innovation has been limited.
The FCA has said that to support pension freedoms and get this market on a good footing for the future, it is important that:
• There are appropriate protections for those least able to engage
• The market drives value and innovation
• Consumers can get the right support when they take important and difficult decisions about their pension savings
The FCA has identified some potential remedies to help tackle all three areas, and have requested feedback on how urgent and appropriate they are by the 15th September 2017.
These proposals are:
• Additional protections for consumers who buy drawdown without advice;
• Measures to promote competition for consumers who buy drawdown without taking advice, including proposals to:
• Allow consumers to take some of their savings early without having to put the rest into a drawdown product
• Make it easier for consumers to compare and shop around for drawdown products
• Tools and services to help consumers make good choices.
There are three ways in which the FCA proposes that additional protections could be implemented.
Default investment pathways is the first option and the way in which the FCA envisages this working would be for firms to be required to offer at least one default pathway for those choosing to use drawdown as a retirement option; this pathway would have a high-level objective and set out the strategy used to achieve this aim. The strategy would need to take account of likely characteristics and needs of the target consumer group, which may mean that more than one pathway could be required for firms with diverse consumer groups. Firms would need to implement a process to ask the consumer about their chosen outcome and monitor pathways to make sure they stay appropriate for the consumers expressed choices. The firm would need to remind the consumer of their choices and how the pathway relates giving them the option to change.
The FCA suggests that a charge cap should be put in place for the default pathways to avoid those who don’t fully engage with their investment decisions being subject to excessive charges. Extension of the IGCS role from purely accumulation to include decumulation so they can scrutinise the value of decumulation products including drawdown and default investment pathways.
Promotion of competition
The FCA proposes to decouple the act of accessing the tax-free cash from a scheme with the decision on what to do with the remainder of the pot. This means that consumers can choose to take their tax-free cash whilst leaving the remainder of their fund in the existing scheme to decide what to do with later. This is hoped to avoid consumers entering inappropriate or high cost products just to access the cash.
The FCA also wants to promote shopping around and are considering intervening to facilitate the introduction of drawdown comparison tools and promoting the use of cost metrics.
The introduction of a drawdown comparison tool would be complex but the FCA believes that it would promote competition amongst providers which is good for the consumer. The cost associated with drawdown is also complex and, in order to make it easier for consumers to understand, the FCA proposes a summary cost metric such as average cost or pension value after cost.
Tools and services
The FCA believes that tools and services could be improved to help consumers understand their options with regards to pension freedoms. This is because it is seen that the pension freedoms have made consumers retirement decisions more complex and they struggle to understand the options available. The FCA believes that this has led to many consumers taking what they deem the easiest option and withdrawing all their pension funds.
Some help is provided already, such as pension wise and provider tools, but these have had a low take up from consumers so far. The proposals are not to increase the information and support, as it is shown that these aren’t used, but to make the information more impactful and effective.
The proposed changes include change to wake up packs, or even scrapping them entirely because in their current form they are not deemed effective, especially for those who have already made up their minds. With regards to changes to the wake-up packs three things are being considered.
• Shorter packs at different intervals
• Having wake up packs provided by an independent party such as pension wise or pas.
• Building the wake-up information into the pension dashboard
The FCA has concerns about the tools currently provided and is considering introducing rules and guidance setting out their expectations of such tools and how the information should be presented. However, they don’t have any evidence any harm is being done at present and don’t want to stifle any innovation in this area.
The FCA is still concerned about the lack of awareness of enhanced annuities and is considering if there is a need to mandate providers to inform consumers of the options for enhanced annuities early in the retirement process.
The FCA is continuing its work in this area and will develop its thinking further. They request feedback on the report and responses to the questions raised within it by 15 September 2017.
The final report is due in the first half of 2018 and will provide an update on the proposed or further remedies giving details on which they are going to pursue.
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