Yesterday was a good news day for people concerned about retirement income. The FCA made two meaningful statements on what it intends to do to help ordinary people trying to manage their in retirement finances. The first was the publication of PS19-01 and deals with disclosures and the second was PS19-05 which deals with investment matters.
Investment Pathways
We are seeking feedback from stakeholders on proposals to require drawdown providers to offer non-advised consumers a range of investment solutions – with carefully designed choice options – to help consumers choose investments that broadly meet their objectives. We describe these as ‘investment pathways’.
Ensuring investment in cash is an active choice
We are seeking feedback from stakeholders on proposals to require drawdown providers to ensure that consumers invest in cash only if they make an active decision to do so. We propose that these providers must also give consumers warnings about the likely impact of investing in cash on their long-term income, both when they enter drawdown (or transfer funds already in drawdown into a new product) and on an ongoing basis.
Actual charges information
We are seeking feedback from stakeholders on proposals to require firms to tell customers beginning to draw on their pension how much they had actually paid in charges over the previous year, in pounds and pence and inclusive of transaction costs.
The investment paper , which may become rather more important , also concerns the role of IGCs in regulating the wild west of “post retirement strategies”.
The FCA has also today announced plans to extend the remit of Independent Governance Committees to oversight of new drawdown default investment pathways.
These workplace pension bodies are charged with ensuring
savers getting value for money.— Josephine Cumbo (@JosephineCumbo) January 28, 2019
A financial bucking bronco.
The best image to explain the current state of affairs for people trying to draw an income from their savings is the bucking bronco.
You get on the beast with no instruction manual and you ride it till it throws you off. Each time you get thrown off you do serious damages to your finances- till in the end you do serious damage to yourself.
How else to describe investments into funds whose overall charge is in excess of 2% pa , where the tenable drawdown rate (gross of charges) is no more than 5%?
How else to describe the dangers of sequential risk through individual investment into volatile funds that can trade – intra day by as much as 10%?
How else to describe the impact of advisory charges which can add 1% + to Discretionary Fund Management Agreements already costing the said 2%+.
Why the proposed extension of scope of IGCs matters
The original scope of IGCs was to oversee workplace pensions. IGCs were given a second task which was to see through the recommendations of the IPB on legacy charging.
In CP19-5 the FCA state that
After careful consideration, we still intend to extend the IGC regime to cover investment pathways.
Many of the larger providers who will offer investment pathways already have IGCs to provide independent oversight of the value for money of workplace personal pensions.
These larger firms will account for most consumers in investment pathways.
As an alternative to IGCs, we already permit Governance Advisory Arrangements (GAAs) for smaller and less complex workplace personal pension schemes. We intend to allow GAAs for providers with smaller numbers of non-advised consumers in investment pathways. We are considering further a proportionate approach for providers with smaller numbers of non-advised consumers.
Providers will not need to provide investment pathways if they require that all their consumers take advice before entering drawdown.
We intend to consult on our proposals for independent governance of investment pathways in a future consultation on IGCs, due for publication in April. This will include a more detailed response to the feedback. Our planned consultation will also include proposed new rules requiring IGCs to report on firms’ policies on environmental, social and governance considerations, member concerns, and stewardship, for the products IGCs have oversight for.
The FCA are also looking into employing IGCs and GAAs to oversee non-advised drawdown from non-workplace pensions.
Right now, the IGCs are relatively under-employed and looking for new work. The biggest area of concern to the FCA is the under-regulated in retirement market where there are no charge caps and little oversite as to whether insurance and SIPP providers products are being used in the interests of clients.
Some of our most powerful insurers and SIPP providers – most notably St James’ Place, do not even have an IGC. They are allowed to get by using a GAA – which is a bite-sized IGCs with bite-sized budgets and influence.
Extending the scope of IGCs and GAAs would seriously strengthen the IGC’s remit to cover the wild west and help tame the bucking bronco.
It seems that IGCs will not be used to assess the value for money of advisory fees – indeed the direction of travel (which will be better flagged in April) – suggests that IGCs and GAAs could have a remit to cover all non-advised drawdown. But the paper does mention that the IGCs and GAAs may be asked to oversee drawdown from non-workplace pensions. I think they should – there is precious little else to protect the 94% of the population who do not pay for financial advice.
Since the majority of the issues that negatively impact people’s drawdown strategies derive from over-charging within the product, the use of inappropriate funds and the lack of value for money from adviser charges, the job of oversite should play to IGC’s strengths.
Taming the drawdown bucking bronco
The proposals in the two documents published yesterday are worthwhile. There has been disappointment published by the Work and Pensions Select Committee and by Which that the charge cap has not been extended into post retirement products but I don’t share the view that it should be.
We need a more fundamental approach to fiduciary care than the blunt instrument of a charge cap.
I would prefer to see the IGCs and GAAs and the FCA test the value people get for the money they pay to be on that bucking bronco. If it can be proven that people can be taught to ride it and ride it as experts, then there is value. But the cost of advice cannot be so great as to ruin the ride.
If the FCA, IGCs and GAAs cannot bring the costs of drawdown down, then we may have to resort to a cap in the final resort; but the cap should be the long stop, not the wicket-keeper.
If people are left to their own devices, the measures that are proposed – the investment proposals – need to be shown to work. I do not see how these measures can provide the protection people need to get the kind of wage in retirement most people expect.
For that people will need a different kind of product, a collective product such as an annuity or CDC. These products carry different risks but – I suspect – risks that people will find easier to deal with.
Have FCA missed the point here? If you need a retirement income to meet essential bills then ensure you have enough guaranteed income to do that, which could be State Pension, DB, or buying some annuity. The bucking bronco is then much more suitable for covering your non-essential expenditure or inheritance aspirations
Adrian
Good point Adrian. Good to have that secure underpin, ideally covering all of your essential expenditure before even thinking about taking ANY risk (unless in extreme health situation etc.).
Henry, the 2% – 3%+ fund charges DO exist, but that is astronomical compared to the median rate. In my business the total investment charges are probably closer to 1% to 1.5% and that includes the ongoing adviser charges, platform charges and so on.
Furthermore, cashflows are completed making a much higher charges assumption to really stress the impact of charges over decades.
The statistical evidence would indicate a managed fund has a lot to prove before you would consider it, and therefore it might be wise to assume tracker first unless there is a specific need to include managed funds in the portfolio.
I’m sure you are aware that tracker funds can cost significantly less than managed funds, so there is no NEED for investment charges to make up 2% to 3% (or more). That is adviser preference which is a business model that clients must be made aware of.
“We are seeking feedback from stakeholders on proposals to require drawdown providers to offer non-advised consumers a range of investment solutions – with carefully designed choice options – to help consumers choose investments that broadly meet their objectives. We describe these as investment pathways”.
With regards to “Investment Pathways” the Tata Steel UK Personal Retirement Savings Plan (PRSP) is with Aviva. This is a good defined contribution plan with a very low annual management charge (approx 0.26%). It has a built in default “Lifestage Approach” which gradually moves your money into less risky investments starting 10 years before your chosen retirement age (default is 65).
If you feel this approach is not suitable you can come out of it and have a choice of approx 250 funds to choose from within the plan. The problem with this being that choosing your own pension fund/s can be a daunting thought for many people, therefore the majority would need fee based financial advice.
As Henry has said many times in these blogs “ordinary people – the 94% of us don’t choose to, or can’t afford to – take financial advice”.
The Tata Steel PRSP – Aviva default “Lifestage Approach” seems like a good idea but there are many financial professionals who’s views are such that in order to provide a decent income in retirement it is better to remain in growth assets instead of moving into less risky investments?
If this is the case wouldn’t it be better if these built in “Investment Pathways” included an option to do so rather than only moving your money into lower risk investments starting approx 10 years prior to your chosen retirement age?
Investment pathways as you describe them sound very similar to the widely derided pensions lifestyling options available since stakeholder pensions were introduced. Sound ok in principle but what if the market soars towards retirement and you have been moved to less risky assets? Is the hypothetical restriction in volatility equal to the capital value of the income you have just secured? How do you know the underlying funds are performing well? Etc.
If you don’t feel inclined to take financial advice or can’t afford it then you have no recourse if things go wrong or it materialises you have invested outside your attitude to risk or without regard to your true capacity for loss. Mea culpa.
If a layperson (trying not to offend any of the many genders) decided to make their own will. Yes they saved £500 odd, congratulations. But would it stand up in court? Did they consider everything? What if someone challenges it? What if their circumstances change etc? Would you feel great about ‘saving’ £500 then?
The fact is that you will only truly know the minimum/maximum risk you could have afforded to take after the fact i.e. either when you run out of money or when you die. Everything else is effectively an educated guess.
Do so at your own risk or seek advice.
I have suggested that these built-in ‘Investment Pathways’ would be better if they included an additional option where you could remain in growth assets, instead of only moving into less risky investments starting approx 10 years prior to your chosen retirement age.
If this was the case there would be no issue if what you say “the market soars towards retirement”.
I like many others have worked for the best part of my life and paid into a pension to hopefully provide me with a wage for life. I am fortunate that I have both DB and DC.
I feel that after paying annual management fees etc on my DC pension there should be no further advisory fees which would eat into my funds?
Surely the built-in ‘Investment Pathways’ can provide more than the current option?