New rules on 'wake up packs', used by providers to give savers more information about their options as they approach retirement, will come into force on 1 November 2019; while providers will be required to clarify charging information from 6 April 2020, according to a policy statement. The FCA is also consulting further on the introduction of standardised 'investment pathways' for consumers who do not take financial advice, until 5 April 2019.
The changes follow the FCA's retirement outcomes review, in which it sought to assess how the retirement income market was evolving following the introduction of the pension freedoms in 2015. The review suggested that consumers who did not seek financial advice could be losing out on retirement income by keeping their pension pots in drawdown invested in cash when they did not intend to spend their money in the short term.
"After wave after wave of charges and governance measures in workplace pensions, similar measures to protect consumers were always inevitable for drawdown and retirement," said pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com.
"In the workplace sphere, we've seen the rise of price-controlled default arrangements which work on a 'set and forget' basis unless the member chooses to intervene later down the line. This helps to make sure auto-enrolled and other workplace money is looked after in the right sort of products and shouldn't get too far off target even if the saver never engages."
"By proposing ready-made investment pathways and charge constraints, the FCA is borrowing principles already deployed in workplace to drive good outcomes for mass market savers. It's a case of applying the same science to the nearest we get to defaults in the retirement space. This, of course, makes sense from a regulatory point of view. It also makes sense from a product point of view, as it helps to make sure a problematic legacy never builds up that will start to cause problems later down the line," he said.
An estimated 100,000 customers enter drawdown without taking financial advice each year, according to the FCA. It is proposing that firms be required to offer four ready-made investment solutions, or 'pathways', to customers, each based on a different set of objectives. Smaller providers would be able to refer investors to another provider or to the drawdown comparator tool offered by the Single Financial Guidance Body.
The FCA is seeking views on its four proposed pathways, as well as related basic rules for how providers should arrange for their customers to make their choice. The proposed scenarios are no plans to touch the money in the next five years; purchasing an annuity in the next five years; taking a long-term income from the money in the next five years; and withdrawing the money entirely. The FCA has also proposed that consumers should be required to make an active decision before investing in cash, and that they receive warnings about the likely impact of investing in cash on their long-term income.
The consultation also sets out details of the FCA’s proposed new fees and charges disclosure requirements for providers. These include a proposed new requirement to disclose annually the actual amount that customers beginning to draw from their pension have paid out in charges over the previous year, in pounds and pence and inclusive of transaction costs. The FCA “may move towards imposing a cap” on charges in future, if it finds that these are too high.
“The pathways model may well help with the development of drawdown and associated products and provide a better option for those who retire without advice,” said pensions expert Tom Barton.
“Taking a step back, these developments all highlight what a complex set of decisions must be taken at, and throughout, retirement. The pathways may work to a point, but visibility of all retirement savings (through pensions dashboards) and developing access to advice and guidance solutions (also through technology) will be needed for a well-functioning retirement market,” he said.