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.
Low consumer engagement:
- 72% of consumers who accessed their retirement savings did so below age 65.
- 55% of retirement savings accessed were fully withdrawn, albeit the bulk of these were below £30,000, the triviality limit prior to pension freedoms.
- Twice as many pots used to purchase drawdown as annuity. 32% of these drawdown plans were established without advice, compared to 5% before pension freedoms.
Lack of shopping around:
- Weak competitive pressure among providers.
- Low levels of switching – there was almost none in the non-advised market despite evidence suggesting switching to a lower cost provider could increase annual income by up to 13%.
- The danger this may drive prices higher and stifle innovation.
- 94% of non-advised clients taking drawdown did so with their existing provider, compared with just 35% of advised clients.
Poor investment choices:
- For many, retirement income choices start with a decision to access PCLS (known as tax-free cash), with not enough consideration given to product and investment selection at this point.
- One in three recently entering drawdown don’t know where the money is invested.
- Some providers defaulting investors into cash or similar assets.
- 33% of non-advised drawdown consumers are only holding cash.
- Someone who wants to drawdown their retirement savings over a 20 year period could increase their expected annual income by 37% by investing in a mix of assets rather than just cash.
- Wake-up packs should be sent earlier, starting from age 50 and every five years until consumers have fully used their retirement savings. These would include a single page summary document and retirement risk warnings.
- From age 55, wake-up packs would include guidance body information and separate information to help consumers to make an informed decision. This includes market leading annuity rates and information on enhanced annuity eligibility.
- Improve drawdown information - especially around charges - with clearer, shorter and more succinct disclosure. They also propose that charges information would be more uniform across providers to enable easier comparison across plans
- Improved annual drawdown information provided to clients, even if they have not started taking income.
The FCA is seeking feedback, although not consulting on rule changes at present, on:
- Providers to offer non-advised drawdown consumers a range of investment options to help meet their needs and objectives. These would be established and monitored by the firm’s Independent Governance Committee.
- Stopping providers from defaulting customers into cash.
- Requiring firms to disclose actual charges paid by consumers in drawdown on an annual basis.
A potential remedy: ‘de-coupling’
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