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.
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.