This phase focuses on:
Listen to Ryan Medlock and Craig Muir from our Intermediary Development and Technical team as they explore the who, what, why and when of the new investment pathways for clients and how they’ll impact the advised process.
Ryan - Hi everyone, I’m Ryan Medlock from Royal London’s Intermediary Development & Technical team.. In today's podcast we want to explore the who what why and when of the new investment pathways for drawdown. I’m joined by my colleague Craig Muir who is a Senior Pension Development & Technical Manager, Hi Craig.
Craig – Hello
Ryan – Craig, there’s been a lot of noise about the new investment pathways but can you give us a bit more background to the introduction and why the Regulator deems them necessary?
Craig – Sure Ryan, they stem from the Financial Conduct Authorities Retirement Outcomes Review where they highlighted concerns that many customers could be missing out on potential future growth of their pension fund as they didn’t make a conscious decision on where to invest their remaining fund when they accessed their PCLS. Really what was happening, as a result of pension freedoms, people were desperate to get access to their tax free cash especially on reaching age 55 but were not engaged with the remainder of their fund. This resulted in many being defaulted in to cash or cash like assets and the regulator stated consumers could get 37% higher income over 20 years if they invested in a mix of assets.
The Regulator has a 2 pronged attack on this, first up, from February 2021, any customer wishing to put 50% or more of their fund in to cash or cash like assets will receive correspondence from their provider asking them if they’re sure they want to do this and recommending guidance and advice.
The second prong is the new investment pathways which are due to be launched from 1 February 2021, but as you know some providers have launched these in advance of this date. So from 1 February, customers will need to make a conscious decision about what they are going to do with their fund.
Now, let me make this clear, they’re not simply trying to put customers in to riskier investments, they’re trying to encourage more engagement with their pension fund with the potential for a greater return on their investments.
Ryan – So what are these investment pathways?
Craig – Well first up there are 4 of them, they’re objective driven and time bound. They are:
I have no plans to touch my money in the next 5 years
I plan to use my money to set up a guaranteed income within the next 5 years
I plan to start taking my money as a long term income within the next 5 years
I plan to take out all my money within the next 5 years
Ryan – Thanks Craig. It sounds like the FCA has gift-wrapped advisers a PROD segmentation strategy for DD clients with those objectives. I’m sure we’ll hear more on that going forward but I’m assuming not all providers will need to offer all four pathways as it sounds like there will be quite a lot of work in developing and managing them?
Craig – that’s correct Ryan, as well as the creation and management of the pathways, providers have product governance requirements, they also have to for example produce statements for the customers and have robust record keeping in place, so lots of new rules and guidelines . Therefore providers with less than 500 non-advised customers per year entering drawdown don’t have to offer any of the investment pathways. They will however have to refer customers who select an investment pathway to either another provider’s pathway solutions or the Money and Pension Service drawdown comparator tool which is due to be launched on 1 February 2021 to coincide with the new investment pathways.
Providers not offering the easement would have to provide pathway solutions for at least 2 of the 4 objectives and will have to refer consumers to another provider’s pathway solutions for any objectives they don’t offer. Unlike providers that use the small provider easement, they cannot refer customers to MAPS.
Ryan – Right then, I heard a subtle drop of the term non- advised - so the investment pathways won’t be applicable to advised clients then?
Craig – It certainly started off looking like that, but the Regulator changed their stance, and advisers, from 1 February 2021 will need to consider the default investment pathways for their advised clients, and if they don’t use them, then they must explain why they’re not using them. It’s almost like RU64 and why not stakeholder except this time it’s why not investment pathways.
Ryan – well I suppose to explain why they’re not using these default investment pathways, one of the things advisers will need to consider is the charge for them, so I’m assuming the regulator has proposed a charge for these?
Craig – Yes but no, but yes but no, well sort of.
Ryan – Do explain, you have me intrigued.
Craig – well the Regulator stated they would not stipulate a maximum charge for these but then went to say they would investigate any provider where the charge is greater than 0.75%. They’ve also said they will review the investment pathways 12 months after their launch to ensure they’re value for money so to me it sounds like although they’ve not said there is a maximum charge, in reality there is. Incidentally I’m sure you recognise 0.75% as the maximum charge for a default arrangement under automatic enrolment and we know what happened there. In fact the house of commons work and pension committee highlighted that this is almost an exact repeat of what happened with automatic enrolment where a charge cap wasn’t initially imposed, and then when it was introduced, it was introduced retrospectively. They actually said the FCA would send a simpler message to the industry if it just set a charge cap now for investment pathways, rather than issuing vague threats to the industry.
I think the reason they arrived at a charge of 0.75% is they don’t want customers who have been in a default arrangement with a workplace pension with a maximum charge of 0.75%, to suddenly go in to a higher charged proposition when they move in to decumulation. So there will be some synergy between accumulation and decumulation.
Just a word of warning though, if an adviser does recommend an investment pathway to a client, they’re best not to select any with a charge greater than 0.75% in case a charge cap is introduced retrospectively otherwise they’ll need to explain to the client why they need to switch them again, which could be a difficult discussion.
Ryan – Makes sense. Are there any other similarities with workplace pensions and automatic enrolment?
Craig – Yes there is. Providers who offer the investment pathways will need to either already have in place or create Independent Governance Committees who will monitor the investment pathways and ensure they deliver value for money. These are the same committees which currently monitor default arrangements under automatic enrolment Defined Contribution workplace pension schemes to again ensure these are value for money for the members. For smaller providers their equivalent is called the Governance Advisory Arrangement .
So both the IGCs and the GAAs will provide additional governance of these investment pathways.
Ryan – so I suppose advisers will need to consider the fact investment pathways come with this additional level of governance when either recommending for or against the pathways for their clients.
Craig – absolutely. Advisers will need to build investment pathways in to their advice process and certainly have this in place by 1 February 2021. It’d make sense to include this as a formal step within Centralised Retirement Propositions – some form of analysis which compares the investment solution being used for drawdown against the pathways.
I suspect the Independent Product Databases such as O&M and Selectapension will be able to help with comparisons and they might do something similar to what they did when stakeholder was launched so instead of creating a dummy stakeholder solution with a charge of 1%, this time they might build a dummy investment pathway with a charge of 0.75%. That way advisers will be able to compare the projection of their investment solution directly with the dummy investment pathway.
Ryan - Thank you Craig for joining me today, I think that’s given us quite a lot of food for thought. I’ve been Ryan Medlock, your host for this podcast. Hopefully you’ll join us again for future podcasts. Thanks and Goodbye.