The FCA’s Retirement Outcomes final report : harm and emerging issues following pension freedoms
Earlier this week the FCA published its final report on its Retirement Outcomes Review, including some far-reaching research.
The FCA’s aim, through its two year review, was to assess the outcomes of the pension freedoms introduced in 2015 and propose fixes for emerging issues – all of which advisers and providers need to consider carefully.
Let’s set the scene with some of the key findings of the FCA’s research :
94% of customers who accessed their pot without advice, selected their existing provider’s offering. This is in stark contrast to only 35% taking the same action, if they had received financial advice.
Around a third of customers in drawdown didn’t know where their money was invested.
Charges for financial products designed for pension decumulation varied between 0.4% - 1.6% and are typically higher than those for accumulation purposes.
Some products identified had over 44 different charge elements and switching a product could inflate annual income by as much as 13%.
Many product providers allowing customers to default into cash – a wholly unsuitable strategy for long term drawdown.
Having a diverse range of assets could increase income by as much as 37% over 20 years.
Many customers don’t understand the tax implications of a full encashment of a pension pot.
Drawdown’s complex, opaque and hard to compare.
Complicated tax rules are also a problem.
So to resolve these issues, the FCA’s proposed a raft of changes in a short consultation to protect customers, by increasing competition and helping them to make better long term decisions:
- Customer ‘wake up packs’, which prompt pension holders to consider their retirement choices ahead of taking benefits, would now be issued at age 50 or earlier if requested and every five years thereafter. The packs would include risk warnings which would normally be given later in the process and a single page ‘headline’ document to improve customer engagement.
- Product providers should offer ‘ready-made’ drawdown investment solutions which reflect standardised consumer objectives. The FCA will be reviewing charging structures of these ‘investment pathways’ in a year’s time and has hinted that it may decide to introduce a charge cap – similar to that on occupational pensions. As part of this, the FCA is looking for some independent assessment of these pathways and associated charges.
- Customers will need to make an ‘active decision’ to be invested in a cash fund. Also, product providers will need to have a strategy for dealing with customers who were ‘defaulted’ into cash, including warnings being sent to customers who remain in cash for long periods of time.
- Key Features Illustrations (KFIs) should include a one page summary and also show the first years’ charges in cash terms, to enable direct comparisons between product providers.
- Customers must be made aware of their eligibility for an enhanced annuity, by being asked a series of qualifying questions around their health and lifestyle.
- When consumers are seeking an annuity income, product providers will be asked to provide information on the ‘best quote’ available on the open market. This will be referred to as an ‘income driven annuity quote’.
- It will be mandatory for product providers to send information at least annually to customers in drawdown, even when no income being taken. This will include a reminder of their chosen investment pathway and their ability to switch.
- In line with the Financial Guidance and Claims Act 2018, before allowing customers to access or transfer their pension pot, a check will need to take place that they have received appropriate pensions guidance, or have chosen to opt out. The FCA is considering how and to whom customers should inform of their decision.
- The FCA suggests that customers would benefit from being able to draw a tax-free cash lump sum, without being forced to make decisions immediately about what they should do with the rest of their pension pot. Naturally this would require a major overhaul of current pensions rules – not to mention the cost to the industry!
- A reminder that the FCA is working with the Money Advice Service and Association of British Insurers to overseeing the development and introduction of a generic drawdown comparison tool, as part of its new Pension Dashboard.
For some of the remedies outlined in the consultation, the FCA is looking for feedback as potentially they will have significant impact on an evolving market – particularly on product providers. The FCA is also considering whether these remedies would apply to the whole of the drawdown market place, including Self Invested Personal Pensions and the consultation is linked to a discussion paper on this subject.
The FCA believes that whilst there is currently less reliance on defined contribution pension pots, it wants to address the emerging issues and harm being done to customers as soon as possible. Therefore the consultation period is very short – responses on some subjects required by the 9th August and others by the 6th September. A feedback statement will be issued, shortly after the consultation to refine its final rules, which will be published as a policy statement and revised text in the FCA’s Handbook in January 2019.
We’ve been reviewing this paper and will respond to the consultation. We also be exploring these proposals and their implications in a future Oracle article.
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