Originally sent 2 July 2018
Almost a year after the interim report of 2017, the FCA’s long-awaited Retirement Outcomes Review final report was published on 28 June 2018, along with new consultation paper CP18/17. At just shy of 200 pages (plus annexes) there’s a lot of content and ideas to consider. The Curtis Banks Group will be responding to the consultation, and we’ll share a summary of our responses with you in due course. In the meantime, we wanted to share our initial thoughts on some of the key points.
The headline announcement is that the FCA does want to pursue the idea of providers offering ‘investment pathways’ to help make sure that non-advised consumers do not end up in unsuitable investments (including sitting in cash). It wants to extend this requirement to all firms offering drawdown, including SIPP providers. The FCA suggests that pension providers would ask their non-advised members to identify their objective for their pension, such as exhausting the funds over a short period or, conversely, leaving it alone save for occasional withdrawals. From the member’s response, the provider would then suggest an investment pathway suitable for the objective. While the measure is primarily intended to help non-advised consumers, the FCA also stated that providers could also make investment pathways available to those with advisers. Providers would still be able to offer their normal investment options to both advised and non-advised customers.
The FCA says that this ‘objective-based approach’ will mean that consumers only have to consider one question (how they want to use the drawdown pot) and will make choosing investments ‘quick’ and ‘simple’. But should this be the case? The review was trying to address the fact that retirement decisions are important and complex, and that retirement is becoming a very fluid and flexible concept for many retirees. If this is the case, can the issue really be solved successfully by reducing the decision to a single question and answer?
The FCA’s proposal also means that there would be investment solutions for all drawdown consumers across the retirement market, but not for all consumers who are still in the accumulation phase. We wonder how long it would be before consumers started asking why their providers only offered these investment solutions once they reach retirement, having potentially spent years in unsuitable investments or cash in the accumulation phase. There will also be disparity between those taking irregular payments in drawdown, and those using uncrystallised funds pension lump sums (UFPLS), where the remaining fund would stay uncrystallised. This isn’t to say that the regulator shouldn’t make improvements unless they will improve things for everyone, but it’s a little too easy to see how this could unintentionally fuel consumers’ negative views of the industry.
The good news is that the FCA is proceeding cautiously with exploring the idea of investment pathways. It has acknowledged the challenges of introducing such measures for certain types of pensions, such as SIPPs, and is offering options to be explored further. For example, it has suggested ways to exclude certain providers and/or types of consumer from the investment pathways solution. This is very welcome: the paper appears to recognise that there is a wide range of products in the market to suit the varying needs of a wide spectrum of investors, and any remedies need to be mindful of that fact.
Wake up packs and risk warnings
Last year’s consumer research showed that information sent to retirees about their options were having very little effect on their decisions and doing little to encourage them to seek advice or guidance. Wake up packs were deemed largely ineffective because they were normally received after the individual had decided how to access their benefits. Similarly, the risk warnings process (whereby providers deliver tailored warnings about the possible consequences of a member’s actions) was simply seen as a barrier to accessing the funds.
In the final report, the FCA has proposed several changes, including:
- Changing the timing of wake up packs, so that they are first sent before the member is able to access their pension benefits (at age 50 and again soon before turning 55)
- Changing the content of the wake up packs to include a single page summary document, which research has shown is more engaging
- Overhauling the risk warnings process, so that warnings are sent alongside the wake up packs.
These changes all seem positive: they directly address issues identified by the research without creating onerous additional requirements for providers or further increasing the risk of information overload for consumers. Highlighting this information early on may also encourage more people to seek financial advice.
Tax free cash ‘decoupling’
The idea of ‘decoupling’ tax free cash from the remaining pension benefits was one of the most widely discussed suggestions in last year’s interim report. In the final report, however, discussion of the idea only spans six paragraphs – one of which is in the executive summary. The FCA has acknowledged that the idea could not be achieved without ‘major changes’ to the tax rules, although it still encourages the Government to consider it as an option. However, if the other proposals to improve consumer engagement in the final report are explored, developed and implemented successfully, it’s hard to imagine that it would be worth the enormous effort required to take this idea any further.
The FCA’s research has repeatedly acknowledged that consumers’ behaviour will change over time: the actions of ‘early adopters’ are rarely reflective of those who follow them, and behaviour will inevitably change as fewer people will reach retirement with significant defined benefit pensions, relying more heavily on defined contribution pensions. These points cannot be emphasised enough, particularly when changes are being proposed based on the results of the research. If the solutions being proposed are intended for those future cohorts (as suggested by the statements in the final report about readying the market for the future), the regulator also needs to carefully consider whether they’re suitable for the retirees in the interim. It may also need to consider whether it’s too soon to take action ready for the retirees of tomorrow: after all, who knows what else may change in the meantime which may affect their requirements?