What’s missing from the FCA’s “retirement income” market study..


In a rather sensationalist blog, I gave my view today on the untimely burial of annuities.

Let’s hope they rest in peace, in the meantime the FCA has discovered a brave new world of Pension Dashboards, non-advised drawdown and even (put in a footnote) collective pensions.

We saw these monsters coming over the hill in its earlier guidance consultation, but the 100 page market study on retirement income that sipped into our mailboxes yesterday morning is the clearest statement yet that the FCA have moved on from a world where financial advice was a mass market solution.

The paper is very clear that there is going to be considerable change from April 2015


The change is not just about the products but about how we access them…

For income drawdown, the barriers would appear to be less material,  (with)  new drawdown products expected to be directed at mass-market customers on a predominantly execution only (or guidance and information) basis through firms’ direct to consumer distribution channels.


Previously income drawdown was the most regulated of products. The Regulator and the advisor shared a view that advice was essential to the use of drawdown. It would now seem that drawdown will succeed because “new drawdown” will be non-advise- execution only – and sold directly to the consumer.

To understand the logic behind this change of position, you need to read all 100 pages. This is my attempt to interpret where regulation is going and to second guess the solution that will emerge from a market in turmoil.

Let’s start with where we’ve come from….the FCAs numbers make for salutory reading

In 2013, 353,000 annuities were sold, two thirds of which were standard annuities. This compares to 22,000 new income drawdown contracts over the same period.

The annuity has been the mass market decumulation solution .

The average(mean) annuity in 2013 was purchased with a pension pot of £33,670. The median value was less than £20,000, meaning that half of all annuity purchases in 2013 were made with pots of less than £20,000.

The natural  annuity replacement for more than half of the market doesn’t look like drawdown, it looks like cash. Even the most optimistic product developer is going to work hard to run a drawdown service for less than £20k.

The average pension pot used for income drawdown purchases in 2013 was almost 2.5 times larger than for annuities, at £80,700.

This statistic really surprises me. It suggests that my earlier work that suggested that the cost of a fully advised drawdown service for an £80k pot is getting typically 3%  of the pot  pa. is true for the average drawdown.  22,000 of these little babies is a market getting on for £2bn, 3% of that is a lot of money.

It would seem that the consumer is waking up from a deep sleep

Our qualitative research indicates that the changes announced in the Budget have raised consumers’ awareness of their ability to take pension income ‘as and when they need it’,suggesting that purchasing decisions are much less likely to be the one-off events that they have historically been.

And the FCA sees the current state of affairs as a near monopoly for advised sales

In contrast to annuities, the majority of income drawdown plans are sold externally, with approximately one-third of sales made with the existing pension provider. To date, income drawdown plans have almost entirely been sold to consumers with advice. In 2013, 97.4% of new income drawdown plan s were sold through independent or restricted advice services.

This is the context for the changes the FCA foresees

We expect the distribution arrangements for drawdown to evolve significantly in the new landscape with the development of more direct to consumer business models with a significant digital/online element.

There may be an app for pensions but…

Given the complexity and choice  of products we anticipate being developed, consumers are likely to find comparison of products more difficult and will need adequate and appropriate support through the retirement journey.

Such support is not envisaged as particularly personal. The FCA is looking at making products easier to understand.

Complex or opaque charging structures would also make comparisons harder and weaken competitive pressure on value.

Sadly, the appetite for decision making still seems to be minimal. In a frightening result (especially for TPAS,CAB and MAS)

69% of the consumers sampled expect the pensions guidance service to provide either a specific recommendation based on personal circumstances, or a tailored list of options  based on the individual’s circumstances.

This is indicative of a demand for services above and beyond that which the pensions guidance will provide.

There is something wrong here. 69% of the 1200 people the FCA surveyed still wanted to be told what to do. Personal empowerment is still a minority sport!

People looking at their retirement options are going to return to work sadly disappointed. They are going to ask for further help from their employer and/or their pension trustees.

The FCA talk of “adequate and appropriate support through the retirement journey” but the only international model that it can call on is Denmark and Holland

The (international) research has identified examples of initiatives to improve consumer financial literacy and access to information.

In Denmark, advice and information websites run by the Government and by pension companies provide simple and comprehensive material on pensions, and offer advice on how best to manage pension funds. Their success is reflected in a high customer satisfaction rate with the information available to them (around 70%) and financial literacy rates.

Similarly, the pensions ‘dashboard’ in the Netherlands, developed and run by the pension federation, together with the Dutch funds and the social security bank (SVB), informs every individual about all pension entitlements they have built up with different pension funds over their lifetime (including their state pension entitlement).

This has encouraged consumer engagement with pensions by making them more tangible and visible. Some indication of the success of the dashboard is provided by self-reported measures of financial awareness.

The study leaves it there but there is an important omission in its research. The FCA ignore the role of the employer in the delivery of this information. In the UK, as in the Netherlands , Denmark and most other OECD economies, it is in the workplace that most pension savings are made and from which most people launch their retirement income.

While employers are showing no appetite for running “in-retirement income schemes” for former staff, they are showing considerable interest in finding a way to help staff exit employment when it is right for them to do this. The definition of “right” may be different for employer and employee, but we can be sure that no employer is going to stand in the way of better outcomes for staff who are ready to pack it in – or at least wind down.

The only reference to the employer I could spot in the document was as a sponsor of CDC schemes.  Employers may have no appetite to run CDC schemes themselves, but they have the in-retirement characteristics that recent IPPR research suggests people want (and employers used to provide through DB.

For the first time, I see specific reference within a Government paper to the CDC product as a means to spend (rather than accumulate) savings

Particular, (the Government) has looked at how CDC schemes might work in the UK. The Government’s proposed model for this would have a .. target pension income for employees (with provision for this to be adjusted if the scheme is under-funded); and pooling of scheme assets (rather than individual funds for each member), with an income paid from this pool at retirement.


The FCA’s market study is labelled an interim report. As such it is hardly surprising that it poses as many questions as it answers.

There may be political reasons why the FCA does not feel it can talk about delivering workplace support and information for those considering their retirement income options. This is of course the turf of the Pension Regulator.

However it is hard to avoid the employer as the key to much of the pre-planning of decision making and while an employer cannot deliver the ongoing support that is clearly needed, it has a great role to play in supporting the guidance process, which is clearly not going to meet everyone’s expectations!

hello pension

About henry tapper

Founder of the Pension PlayPen,, partner of Stella, father of Olly . I am the Pension Plowman
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2 Responses to What’s missing from the FCA’s “retirement income” market study..

  1. Thanks Henry, that raises an interesting point aboiut the employer’s involvement that I hadn’t thought about. While I hate to muddy the waters further, there are some future changes for older employees which they, and their employers, ought to be aware of.

    At the moment, employees over the Qualifying Age for State Pension Credit (QASPC) can receive Working Tax Credit to increase their earnings. They can even be passported to maximum WTC if they receive Pension Credit (although there is a long standing circular assesment glitch for some people), When Universal Credit is finally wholly in place, things will be different. WTC will be abolished and older workers will not be able to access Universal Credit, even if it would make them better-off than they would be on PC. We don’t yet know whether there will be transitional protection for people in this situation.

    That adds another ‘interesting’ element into retirement planning. Thank goodness that the governemnt is simplifying the benefits system and protecting pensioners.

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