The UK financial regulator has proposed a series of measures to help retirees cope with recently-won pension investment freedoms.
According to a recent Financial Conduct Authority (FCA) consultation paper, many UK retirees – especially those who had not sought financial advice – were opting for high-cost, conservatively-invested pension options.
In 2015 the UK government removed restrictions that required retirees to take invest most of their pensions into annuity products.
However, the FCA report says most retirees have struggled to effectively exercise their pension freedoms – opting for existing scheme default options there were often cash-heavy.
“For many, retirement income choices start with a decision to access tax-free cash rather than other questions. At that point, consumers face a range of complex decisions such as which provider to use, where to invest their remaining pot and how quickly to drawdown,” the FCA paper says. “They also need to think about how long they expect to live. We found many consumers who do not take advice struggle with these decisions, and many end up in investments that may not be right for them, including in cash.”
About a third of all non-advised UK retirees had invested 100 per cent of their pensions in cash, the report says. While shifting to cash might be appropriate for some retirees, the FCA estimates about half of that group would be losing out on retirement income as a result.
The FCA research found roughly a third of retirees in drawdown phase also had no idea of where there money was invested and many others only had a “broad idea”.
“We also found weak competitive pressure and low levels of switching in the nonadvised drawdown market, and looked at whether this might drive higher prices and less innovation,” the paper says.
“Comparing the behaviour of advised and non-advised consumers presents a starkly different picture. 94% of consumers who accessed their pots without taking advice accepted the drawdown option offered by their pension provider, compared to only 35% of advised consumers.”
As part of a ‘remedy package’ the FCA proposes pension providers should not be allowed to offer cash as the default retirement income option.
Furthermore, the regulator says providers will have to offer members more useful information on pension options including a simplified ‘wake-up pack’ (supplied to imminent retirees by schemes).
Under the proposals, pension schemes would also have to offer ‘investment pathways’ for retirees – defined as three investment solutions packaged to “meet fairly straightforward needs, reflecting standardised consumer objectives”.
“The option of capping charges remains open,” the FCA says. “Should we introduce pathways, we would expect firms to develop them with consumers’ best interests in mind, including appropriate charge structures and levels. At this point, however, we do not know what the ‘right’ price for such pathways is.”
Finally, the FCA has proposed a requirement for pension schemes to inform retirees annually whether they have drawn-down income or not.
“Should we introduce [the reporting requirements], we also believe consumers should be reminded annually of their chosen investment pathway and their ability to switch, to encourage the consumer to consider whether the investment pathway they are in is still appropriate for them,” the paper says.
In a statement, FCA head of strategy and competition, Christopher Woolard, said: “We know that the choices introduced by the pension freedoms have been popular with many consumers.
“However, they’re now required to make more complicated decisions than ever before. Many people need more support when making choices. The measures we have outlined today will help them think about that earlier, create investment pathways to help them with their choices and make costs and charges easier to understand.”
The FCA ‘Retirement outcomes review’ launched in July last year.