UK watchdog proposes reforms to at-retirement market

The UK regulator has proposed reforms to the at-retirement market to help consumers decide how to use their pension savings.

The Financial Conduct Authority’s (FCA) Retirement Outcomes Review, published today, found that a third of retirees that had chosen drawdown instead of an annuity for their pension income did not know where their money was invested.

Retirees also failed to shop around for different options for withdrawing their defined contribution (DC) pension savings, meaning many had defaulted into products that were more expensive or less suitable, the FCA said.

The regulator stated: “Preventing poor outcomes in the pensions and retirement income market is an important priority for the FCA.

“The market is still evolving, and it will be some years before most people are primarily reliant on a DC pot for their retirement income. We have identified harms and emerging issues that we are keen to address promptly, so the market is on a good footing for the future.”

Flexible drawdown options have become significantly more popular in the UK following the introduction of pension freedoms in 2014, which removed the requirement for DC savers to buy an annuity at retirement.

Drawdown products allow pensioners to remain invested post-retirement, but the FCA said weak competition and a lack of product innovation had led to expensive and complex charging structures. It also expressed concern that a third of those who opted for drawdown without taking advice were invested entirely in cash.

“Holding funds in cash may be suited to consumers planning to drawdown their entire pot over a short period,” it said, “but it is highly unlikely to be suited for someone planning to draw down their pot over a longer period. We estimate that over half of these consumers are likely to be losing out on income in retirement by holding cash.”

The FCA has proposed the introduction of “wake up” packs to be sent to DC savers at age 50, and again every five years until DC pots are withdrawn. These packs would include details of the options open to retirees, as well as risk warnings and fee information.

It also proposed offering all UK savers three investment “pathways” to help them choose how to access their savings. These would be based on whether an individual wanted to remain invested for a long period, to access cash over a short period, or to have a steady income in retirement.

The FCA’s full report is here, and its consultation paper regarding its proposals is available here. The consultation is open until 6 September.

‘A step in the right direction’

Chris Knight, CEO of Legal & General’s retail retirement arm, said the regulator’s findings “raise the question of whether we’re all prepared to make hard choices about how we access our pension pots”.

“A growing number of people are reaching later life without taking advice or even guidance to help them make informed decisions, and many are continuing to take what the FCA describes as the ‘path of least resistance’,” he said.

Knight added that savers would also be supported by the government’s proposed pension dashboard, while providers needed to support the UK’s advice market for individuals, including improving the provision of retirement guidance.

Lee Hollingworth, partner at consultancy Hymans Robertson, said: “The industry needs to start viewing drawdown as a service, not a product. We need personalised solutions that work towards an individual’s goals.

“The FCA’s proposal of investment pathways to get people into appropriate funds based on duration of investment is a great step in the right direction. Investments should be aligned to goals and provided at low cost.”

Hollingworth expressed disappointment that the FCA had not introduced a charge cap for drawdown products, similar to the 0.75% annual limit imposed on workplace DC pensions.

In its report, the FCA said charge caps remained “an option”, but admitted that it did not know what the appropriate price limit for drawdown would be. It has advised firms to use 0.75% as a “point of reference” and said it would review charges one year after implementing its “pathways”.

Andy Tarrant, head of policy at The People’s Pension, one of the UK’s largest workplace DC providers, said: “Deciding what to do with your pension savings remains one the most important financial decisions that people will ever make, and the FCA’s report is a welcome and considered look at how to protect savers and support them to make better choices.”