On 28 June the FCA released the Retirement Outcomes Review (ROR) final report along with a consultation paper CP18/17, looking for feedback on the proposed changes. The consultation for investment pathways, cash defaults and actual charges information closes on 9 August 2018. For all other proposed changes the consultation closes on 6 September 2018.
The report considers the efficiency of the retirement market since the introduction of pension freedoms. While there’s a significant focus on the plight of non-advised consumers, the findings are likely to impact the advised market too. The report focuses on retirement savings in pensions, referred to throughout this article as ‘retirement savings’.
Fewer companies offer defined benefit (DB) schemes to their employees, meaning future retirees will be more reliant on defined contribution (DC) plans to provide retirement income. Auto enrolment has resulted in huge numbers of employees ‘defaulted’ into decision-free pension saving, only to be faced with an active decision at retirement. It seems many are ill-equipped to make these choices, so the report explores options to help these consumers achieve better outcomes in retirement.
The FCA is seeking feedback, although not consulting on rule changes at present, on:
The ROR identified another potential solution - allowing consumers to access tax free cash without having to move the rest of their retirement savings into drawdown. This is referred to as ‘de-coupling’.
The ROR explains that the desire to access tax-free cash is the main driver for moving to drawdown, regardless of the amount of retirement savings in the plan. Evidence suggests many of those entering drawdown don’t consider themselves to be selecting a retirement solution, and as a result don’t give enough consideration to the suitability of the plan and investment options.
While the ROR does not seek consultation or feedback on this proposal, the findings will be presented to HM Treasury, with a recommendation that the current system of ‘coupling’ access to tax-free cash and the need to enter drawdown may lead to consumer harm. Any alteration to this rule would however require changes to the pension tax regime, so it’s unlikely to provide a solution in the short-term. It must also be remembered when considering such a proposal that it could mean increased costs due to the system changes required, or the danger of more consumers taking their tax-free cash early.
The table below outlines the FCA’s current proposals to remedy the issues the ROR raises.
So while we have the ROR final report, there’s a consultation under way, with another to follow before any agreement is reached on the route forward. So watch this space.
Financial Conduct Authority, Retirement Outcomes Review final report, June 2018
Financial Conduct Authority, Retirement Outcomes Review: Proposed changes to our rules and guidance, June 2018
Senior Business Development Manager
Justin Corliss is a Business Development Manager with Royal London. Justin started his working life in his native Australia where he worked for the Commonwealth Bank of Australia in client facing mortgage roles. Since moving to Scotland in 2002 he has held positions as a broker consultant for both Scottish Widows and Scottish Life dealing predominately with pensions. Before assuming his current role he worked as an Employee Benefits Consultant with a private firm. Justin holds the Chartered Institute of Insurance Advanced Diploma in Financial Services including AF3.