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FCA proposes package of defined contribution pension protections

Better communications sent earlier, stronger risk warnings and more clarity over scheme charges will benefit defined contribution (DC) pension savers, the Financial Conduct Authority (FCA) has said.03 Jul 2018

It is consulting on a package of measures to protect consumers, improve engagement and promote competition following the entry into force of the pension freedoms in April 2015, following an extensive review of the DC pensions and retirement income market.

FCA executive director Christopher Woolard said that giving DC savers more flexibility over how to access their pension savings meant that consumers are "now required to make more complicated decisions than ever before".

"Many people need more support when making choices," he said. "The measures we have outlined will help them think about that earlier, create investment pathways to help them with their choices and make costs and charges easier to understand."

"This is an important market that is still relatively new and is continuing to evolve. This is not the end of the work we are doing and we will continue to keep the market under review as it develops," he said.

The measures proposed by the FCA are designed to protect consumers and to help them make better choices before accessing their pension savings; at the point of making a decision; and on an ongoing basis throughout their retirement. Its consultation, which closes on 6 September 2018, sets out proposed new rules for some of the measures; and seeks broader feedback on others on which it intends to carry out further work before putting forward final proposals.

The FCA has proposed a number of changes to the 'wake up' packs which are sent out to pension savers as they approach retirement. Savers should begin receiving these at age 50, five years before they can begin accessing their pension, and then every five years until they have fully withdrawn their pension. The pack would include a one-page 'pensions passport' summary document in "clear and accessible" language, along with specific retirement risk warnings.

Consumers who are at the point of choosing whether to access their savings by way of a drawdown product or an annuity should be given a summary document, including a standardised one-year charge figure for the product provided in pounds and pence rather than as a percentage. Providers should also make it clear where the consumer is eligible for an enhanced annuity. The FCA is also working closely with the Money Advice Service and the Association of British Insurers to develop a drawdown comparator tool.

The FCA is also seeking feedback on the potential introduction of ready-made drawdown 'investment pathways', which would be designed to reflect standardised consumer objectives. It has also suggested that consumers would have to make an active choice to access a cash drawdown product, after its research found that some drawdown customers could have received 37% more retirement income had they invested in a mix of assets rather than cash. Providers would be expected to come up with a strategy for dealing with consumers who have already been defaulted into cash.

Charges on drawdown products can vary considerably between providers, and can be "complex, opaque and hard to compare", the FCA said. It warned that it may introduce a cap on charges in the future if firms did not develop standardised investment pathways with appropriate charge levels.

Individuals who have already accessed their pension should receive information from their provider annually, whether or not they are currently drawing an income from their pension pot, the FCA said. This information should incorporate actual charges paid, which again should be provided in pounds and pence. The FCA is also seeking views on whether providers should remind their customers annually of their chosen investment pathway and their ability to switch.

The FCA intends to publish a further consultation paper in January 2019, and its final rules by July 2019.