The Financial Conduct Authority (FCA) was presented with a huge regulatory challenge when former chancellor George Osborne tore up the retirement rule book in 2014. The pension freedoms have bedded in and are working well, but the FCA’s latest retirement outcomes review (ROR) has identified more can be done to help investors make the most of their retirement savings.
Last week’s ROR policy statement and consultation paper are the latest steps in an ongoing regulatory evolutionary journey. They sit within the context of the retail distribution review, the financial advice market review and the more recent reviews of asset management and platform sectors.
The policy statement sets out several measures to better protect investors and stimulate their pursuit of higher retirement income outcomes. The move to a shorter, simpler one-page wake-up pack, previously dubbed the pension passport, is a specific measure Hargreaves Lansdown lobbied for in association with a handful of insurance companies.
The packs will also be sent out earlier, to clients from age 50, prompting a longer run-up at the retirement income decision-making process. Similarly, the promotion of enhanced annuities for those who are eligible, and the move to greater transparency on drawdown costs, should stimulate more effective competition in the retirement income market.
Elsewhere, the Single Financial Guidance Body is developing a drawdown comparison tool, which should stimulate and facilitate competition. Pensions dashboards may help too, eventually.
The implementation schedule for these changes, across the end of 2019 and the first quarter of 2020, will require concentrated work for pension providers. For example, changes to the wake-up packs will require systems and process changes to ensure customers get the right information at the right time.
Alongside the policy statement, the consultation paper explores how retirement income pathways can be delivered.
Many people entering drawdown have limited experience managing their own investments. The FCA is addressing the twin problems of people not knowing how to invest their money, and the knock-on consequence of many ending up parking their money in cash for the long term as a consequence.
The consultation proposes pathways to cover four scenarios, ranging from wanting to take tax-free cash and not draw an income for at least five years, through to planning to strip all the money out within the next five years.
The regulator has stopped short of imposing a price cap, while at the same time delegating governance to internal governance committees. But it has made it pretty clear that if charges are not competitive relative to a 0.75% benchmark, a price cap may follow.
There are some misgivings about this aspect of the consultation. On the one hand, it is very hard to argue against lower charges, and in our current political reality we are likely heading this way.
However, the consequences of getting investment management wrong in the decumulation phase can be catastrophic in contrast to the accumulation phase, where poor management will only ever result in a relatively smaller pension pot.
The pricing benchmark points towards a largely passive investment approach, which may do investors a disservice.
The FCA is also introducing risk warnings and controls to avoid investors parking their pension funds in cash as a long-term solution. For example, it will not be possible to default investors into cash. Instead, it will have to be an active choice.
Our own experience of investors holding cash in retirement is they are generally doing it for a specific reason, rather than simply ending up there by default. For example, because they are concerned about short-term market risks, or they are planning further withdrawals.
We need to make sure we do not confuse weather and climate. The FCA is right, cash is generally not appropriate for long-term investing. But there may be valid reasons to hold cash over shorter time periods.
We should be mindful of the risk of herding investors out of cash and into passive investment strategies, where they may not be aware of the risks they are taking on.
Tom McPhail is head of retirement policy at Hargreaves Lansdown.