Are investment pathways the remedy to the problems of drawdown? (Thoughts on FCA’s Retirement Outcomes Paper)

FCA 78

Nearly a year has gone by since the publication of the FCA’s Interim report into Retirement Outcomes (July 17). Today we have the full report and you can read its summary here. and the full paper is in the link below

CP18/7

This is a quick heads up on the paper, which I will be looking at in more detail throughout the day. As Tom McPhail points out, the paper is wide-reaching and will become important as its implications become understood.

tom

What has the FCA learned in the meantime?

They now estimate that there are approximately 25m DC pension plan holders. There are over 6m relating to untouched and partially crystallised plans for consumers aged 55 or above and 19m relating to pension plans for consumers aged under 55.]

In 2012 there were 420,000 annuities sales, and in the years ended 30 September 2016 and 30 September 2017 the number of annuity sales fell to 82,391 and 70,452

Asset allocation

Overall 33% of non-advised drawdown consumers are wholly holding cash;

Someone who wants to drawdown their pot over a 20 year period could increase their expected annual income by 37% by investing in a mix of assets rather than just cash

Charges

By switching from a higher cost provider to a lower cost provider, consumers could increase their annual income by 13%. The FCA calls what’s been going on at some providers a “quiet rip-off”.

Complexity

Drawdown charges can be complex, opaque and hard to compare. Products can have as many as 44 charges linked to them

Lack of innovation

The FCA see little innovation and worry whether this is a sign of an uncompetitive market. However, they believe that incentives for innovating will increase over time as DC pot sizes grow.

What the FCA thinks they can do (Scope)

protect consumers from poor outcomes
improve consumer engagement with retirement income decisions (Chapters 4 and 5)
promote competition by making the costs of drawdown clearer and comparisons easier

Single Financial Guidance Body (?)

There’s plenty in the paper for the SFGB. Frankly – whether it makes much of a difference is anybody’s guess. I flicked through the pages surrounding guidance – keen to get to the paper’s meat

Here’s the beef!

Investment pathways

The FCA thinks that providers should offer three ready-made drawdown investment solutions (‘investment pathways’) within a simple choice architecture.

Cash is an opt-out

The believe that new consumers accessing drawdown should have to make an active choice to be in cash

Annuities and enhanced annuities to be promoted

They propose to require providers to ask consumers questions on health and lifestyle factors to assess their eligibility for an enhanced annuity.

Information trumps advice for the most of us

And in section 6 of the paper, they accept that the default position for most people will be to invest for themselves.

6.28 Since the introduction of pension freedoms, we have re-considered the relevance of this requirement. Most pots moving into drawdown now are small; it will not necessarily be in the best interests of many consumers with small pots to pay for advice on investments and their income withdrawals.

49 steps

If you want to get to know the paper in as easy a way as possible. I suggest you start with its questions and work backwards into the consultation.

Here are all the 49 questions

Do you agree with our current high-level thinking on the key elements of our potential remedy? If not, what would you suggest?
Does the approach we are considering taking adequately capture the objectives of non-advised consumers entering drawdown who might use the investment pathways? If not, what would you suggest?
Do you agree with our suggestion that firms should only offer 1 investment solution in respect of each of the objectives? If not, what would you suggest?
Do you agree with our suggestion that firms should not be permitted to provide a single investment solution to cover all of the objectives? If not, what would you suggest?
Do you think that firms should offer investment solutions for all the investment pathways? If not, what would you suggest? If a firm does not offer an investment solution for a particular investment pathway, should it be required to enter into an arrangement with another firm to provide it?
Do you agree with the approach we are considering taking on prescription around the investment solution and risk profile of investment pathways? If not, what would you suggest?
Do you agree with the approach we are considering taking on permitting firms to use pre-existing investment solutions to offer an investment pathway? If not, what would you suggest?
Do you agree with the approach we are considering taking on allowing firms to offer investment solutions other than investment pathways? If not, what would you suggest?
Do you agree with the approach we are considering taking for the choice architecture to be implemented by firms? If not, what would you suggest?
do you agree that investment pathways should also be made available to advised consumers? If not, what would you suggest?
Do you agree with the approach we are considering taking on how we should define advised consumers for the purposes of the application of our rules on investment pathways? If not, what would you suggest?
Do you agree with the approach we are considering taking in relation to circumstances where consumers are designating funds to drawdown on multiple occasions? If not, what would you suggest?
Do you agree with the approach we are considering taking to require firm review of investment pathways on an annual basis? If not, what would you suggest?
Do you agree with the approach we are considering taking for ongoing disclosure to consumers about investment pathways? If not, what would you suggest?
Do you agree that we should apply our remedies to the whole of the non-advised drawdown market, including SIPP operators serving this market? What would be the costs and how would the market respond?
Do you think we should consider carving out from our remedies those SIPP operators focused on advised consumers and sophisticated investors? If so, how do you think we should do this? Should we consider an alternative proportionate solution?
Do you think that we should limit the scope of application of our rules on the investment pathways? What would be the impact on the SIPP market if we don’t limit the scope?
What would be the costs and challenges of the different options set out? Are some more likely than others to distort the market? Are there ways to mitigate the impact of this?
Would SIPP operators be able to demonstrate that their consumers are advised and/or sophisticated/high net worth investors?
How might an appropriateness test work in practice?
Should we not apply the remedy to non-advised consumers who have self-selected an investment strategy even though these consumers might benefit
Should we instead not require firms with small numbers of non-advised consumers to offer investment solutions for any of the investment pathways, but require them to refer consumers directly to another provider for investment pathways?
Do you agree that the IGC regime should be extended to investment pathways? If not, what alternative regime would you propose
Do you consider that a requirement for independent oversight should apply to other decumulation products (ie not only to investment pathways)? If so, why?
Do you think we should carve out from the requirement those providers which only provide decumulation products for advised consumers, or those in less need of protection? How would this work?
Do you have any other issues or concerns about the proposals?
Do you agree with our current thinking that a single, default investment pathway is unlikely to be suitable in drawdown? If not, please provide reasons why you disagree.
Do you agree with the approach we are considering taking to require making investment wholly or predominantly in cash an active choice? If not, what would you suggest?
Do you agree with the approach we are considering taking in relation to mandating warnings to those making an active choice to invest in cash? If not, what would you suggest?
If relevant to you, what have you done – or what do you plan to do – about your current drawdown consumers who have already been ‘defaulted’ into cash until now, but who are unlikely to be best served by this investment strategy for the remainder of their retirement?
Do you think we should require firms to issue warnings to consumers who are invested in cash on an ongoing basis? If not, what would you suggest?
Do you agree with the approach we are considering taking in relation to a minimum limit and the cooling-off period? What minimal limit would you suggest? If you do not agree with the approach we are considering taking, what would you suggest?
What impact do you think our proposals on preventing ‘defaulting’ into cash would have on the business models of SIPP operators? Do you think this change would be appropriate?
Do you agree with our proposals on ‘wake-up’ packs? If not, how should we change them?
Do you agree with our proposal to mandate specific retirement risk warnings alongside ‘wake-up’ packs? If not, how should we change it?
Do you have any further comments on our proposals for retirement risk warnings?
Do you have any comments on our proposals for the reminder?:
Do you agree with our proposal to require firms to ask consumers questions that will help a consumer determine whether he or she is entitled to an enhanced annuity?
Do you agree with our proposal to require that firms include information about the consumer’s potential eligibility for an enhanced annuity in the quote for comparison?
Do you agree with our proposal for amending the annuity information prompt requirements for income driven quotes? If not, how would you suggest we amend the information prompt to achieve our policy objective
Do you agree that key information should be summarised on the front page of KFIs?
Do you agree that the summary information should show a one-year single charge figure expressed as a cash amount?
Do you agree that information in KFIs should be presented in real terms (that takes account of inflation)?
Do you agree that a KFI should be provided when a client is accessing drawdown as an option or variation under an existing contract or UFPLS option under an existing contract, and also the first time they take an income (where this happens later)?
Do you agree that firms should provide regular client communications for those who have withdrawn tax free cash but not taken an income?
Do you agree that firms should regularly remind consumers to consider reviewing their decisions, particularly investment choices, rather than reminding them how to obtain advice?
Do you agree that consumers should receive information on actual charges paid expressed as a cash amount?
How do you consider this would best be achieved by firms?
What would you estimate to be the cost of these changes?