FCA Retirement Outcomes Review – what’s in store for advisers?
There are signs where the ROR might be focused but the regulator must ensure its proposals are realistic, says AJ Bell’s Tom Selby
Regulators and policymakers have understandably been playing catch-up in the four and a bit years since former Chancellor George Osborne uprooted the UK retirement market.
The pension freedoms, while hugely popular, were undoubtedly announced with politics rather than practicalities in mind. And because the reforms were almost entirely untested (in the UK at least), it has taken the Financial Conduct Authority (FCA) a while to build a picture of consumer behaviour and recommend any possible areas of concern.
The culmination of that work, the Retirement Outcomes Review, is set to be published at some point this Spring. The report is likely to shape the worlds of providers, advisers and retirees for the next 12 months and beyond.
The interim Retirement Outcomes Review report, published in July 2017, gives us some clues as to the key areas the regulator is likely to focus on.
While the report concludes there is no evidence of savers “squandering” their pensions, the FCA highlights ‘emerging issues’ it could seek to address in the retirement income market. Most of these will not be the least bit surprising to anyone who has spent time at the pensions coalface.
Lack of trust
For example, over half (52%) of fully withdrawn pots are not spent but transferred into other savings and investments. While the vast majority (90%) of these withdrawals were pots worth £30,000 or less, there is still a risk people are paying too much tax or missing out on investment growth.
Responses from savers who have done this suggest a lack of trust in pensions is a major problem.
One man in his 50s who had taken out his entire pension pot said: “You just don’t know what the Government will do, because they can change the rules at any time.”
That’s certainly a sentiment most in the industry can empathise with.
Another commented: “I knew I didn’t want to leave it in the pension pot, because my view is that there won’t be anything left by the time I pull it out…I’ve never believed in pensions.”
It’s unlikely the FCA can tackle this trust deficit in isolation. The quote from the man in his 50s points to the important role Government has to play in proactively reassuring people the goalposts won’t be constantly moved if they choose to keep their money in their pension. We remain of the view that establishing an independent commission would help build the stable foundations savers are clearly crying out for.
Boosting take-up of regulated advice and guidance is also key, while the way the industry as a whole is required by the FCA (and other bodies) to communicate with savers needs to be updated to reflect the new reality we live in.
‘Shopping around’ in drawdown
Another issue flagged by the regulator centres on the perceived lack of ‘shopping around’ in drawdown. With roughly two people now entering drawdown for every one person who buys an annuity, the regulator understandably wants to ensure savers aren’t sleepwalking into a bad retirement income deal.
Unfortunately the FCA appears stuck in the past, viewing drawdown as a ‘product’ similar to an annuity and therefore considering potentially dramatic interventions because people aren’t shopping around before they ‘buy’.
Of course drawdown is very different to annuitisation, primarily because you are free to switch provider at any point after you have entered drawdown. Furthermore, the line between accumulation and decumulation is blurred – there is no particular reason why someone should switch provider or investment strategy at the point they enter drawdown. Indeed, for many people the sole aim of going into drawdown is to access their tax-free cash.
Despite this, the FCA is facing mounting pressure – most notably from the influential Work & Pensions Committee – to create ‘default pathways’ for drawdown. Under the skeleton structure outlined by the regulator in its July 2017 paper, providers would be required to offer all those who enter drawdown a default investment option based on their priorities.
It is therefore likely that, if implemented, this proposal would require providers to ask customers a series of questions about their retirement plans and then make a recommendation based on their responses.
If the regulator goes down this route (and my hunch is it will) it needs to be realistic in the timescales it sets and ensure it doesn’t layer extra complexity on savers who simply want to access their own money. It will also have to set out how a product recommendation can be made without straying into advice territory.
There are also heaps of practical hurdles to overcome which make the April 2019 deadline proposed by the Work & Pensions Committee at best ridiculous and at worst dangerous. For example, how many default funds will providers have to offer? What will the process of auto-enrolling customers into a default look like? And how will a system be created which ensures people aren’t accidentally defaulted into a fund they don’t want?
As the FCA begins to wrap its protective wing around the pension freedoms, these practical questions must be answered to ensure the reforms continue to work well for consumers.