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FCA’s Retirement Outcomes Review: industry comment

The FCA  has published its interim report of the Retirement Outcomes Review and we include below a selection of the leading comments coming into the IFA Magazine office. You can find a copy of the report here.

Stephen Lowe, director at Just Group said: “The trend to move money out of pensions into other, less tax efficient, savings and investments shows that customers are facing incredibly difficult decisions and are not getting enough support to make choices that lead them to the best outcomes. Pension Wise is a valuable service to tackle this problem but until it is made the default choice for those accessing pension savings, much like auto-enrolment for savers, then customers will continue in many cases to receive poor value.”

Tom McPhail, Head of Policy at Hargreaves Lansdown: “This report looks like a regulatory cry for help; the FCA seems to be trying to put the pension freedom genie back in the bottle. The liberalisation of pensions has proved very popular with investors but this regulatory review highlights some of the shortcomings in the system. The FCA is looking at a spectrum of paternalistic interventions, such as price caps and governance committees  but we’re not sure this is in consumers’ best interests.

They have expressed concern about a lack of competition in market place, yet the majority of the measures proposed here seem likely to stifle competition: better investor engagement is likely to lead to better competition. We’d like to see more emphasis placed on helping investors make good decisions for themselves. The FCA have also indicated they don’t want to force investors to take advice yet their proposals around default investment strategies appear in conflict with the Financial Advice Market Review conclusions. The government needs to engage with the challenges set out here and to look at how it can help savers and investors to make the most of their money. A savings commission to build consensus across industry and policymakers looks an increasingly good idea.

The FCA states that 94% of non-advised drawdown sales were made to existing customers; however this could mask the fact some investors consolidate their pots in the years running up to taking a drawdown income.

The FCA  review identified 5 emerging issues:

  • Many consumers have fully withdrawn pension pots to move into savings elsewhere, partly driven by lack of trust in pensions
  • Consumers who access their pots early without taking advice typically follow the ‘path of least resistance’, accepting drawdown from their pension provider without shopping around
  • Many consumers buy drawdown without taking advice but may struggle with the complexity of the decisions they have to make
  • Providers are continuing to withdraw from the open annuity market
  • There is limited innovation for mass market consumers

The FCA has set out the following proposed remedies, on which it is now seeking discussion with stakeholders:

  • Additional protections for consumers who buy drawdown without advice, similar to protections already in place for automatic enrolment
  • Measures to improve competition for consumers who buy drawdown without taking advice, including:
    • Proposals to enable consumers to access some of their savings early without having to move the rest into a drawdown product
    • Proposals to make it easier to compare and shop around for drawdown products
    • Tools and services to help consumers make good choices, primarily by building on existing initiatives

They also state that they will keep under review the open annuity market and the withdrawal of providers from this market.

The FCA is considering the introduction of default investment pathways, including a possible charge cap and separate governance arrangements (Independent Governance Committees).”

Jackie Spencer, Pension and Retirement expert at the Money Advice service: These findings highlight that it has become even more important for people to take time to make a decision about their pension pot which will ensure it lasts for the full length of their retirement. Researching all of the options available and shopping around to get the best deals is vital and the Money Advice Service website has plenty of information to help with this. Once people have an understanding of their options it is worth seeking regulated advice for a bespoke recommendation which will meet their individual needs. The Retirement Advice Directory will help find regulated advisers across the UK.

Tim Gosling, Policy Lead: DC, Pensions and Lifetime Savings Association, said: “The FCA’s interim retirement outcomes review makes for disturbing reading. Without timely action now, those retiring in the near future who are dependent on defined contribution (DC) pots and who have no access to advice will not receive the retirement they hope for.

“We need two things. First, we need a smoother customer journey at retirement that makes the line of least resistance an income product rather than cash. This may mean a form of “soft” default, intended to preserve consumer choice but designed to connect savers to the income 84% say they want.

“Second, we need a new generation of high quality retirement income products. These need to have strong independent governance and be suitable for those needing an income but who do not have access to advice.  Government and the FCA should be mindful of lessons learnt in the workplace pensions market after the 2013 Office of Fair Trading Report to ensure product quality and also ensure they are open to fresh thinking about how to stimulate the development of new products.

“Over half (52%) of fully withdrawn pots have not been spent but moved into other retirement savings or investment vehicles – with associated tax, investment and benefit risks.  The report suggests that this may be due to lack of public trust in pensions so we need to work hard to address this issue by helping the industry to evolve to meet the expectations of consumers saving for and transitioning into retirement.

“The industry does not have long to get this right.”

David Newman, Head of Pensions at Close Brothers Asset Management: “The figures show that the retirement crisis still looms large. It is concerning that over half of those pensions pots accessed have been fully withdrawn, and while the withdrawn pots are mostly below £30,000, there is a fear that consumers are losing out on tax benefits by doing so; when entering retirement, every little helps. The fact that consumers are also increasingly accessing drawdown without taking advice should also be a worry, and could mean that many are running the risk of exhausting their savings too early by not having the right investment or drawdown strategy.

“The freedom offered by the pension changes has clearly been embraced by consumers, but it is important that the FCA monitors the consequences and intervenes accordingly. The industry as a whole needs to work closely with the FCA to develop tools and services to help consumers understand their options after the pension freedoms as well as improving trust in pensions.”

Kate Smith, Head of Pensions at Aegon said: “Today’s report highlights just how significantly the pension freedoms have changed consumer behaviour when it comes to retirement decisions and the knock on effects this is having on the industry. The FCA’s figures suggest we’re seeing the majority of small pots accessed well before traditional retirement age with around two fifths of people either paying down debts or spending the money, with half saving or investing it. The trend for people to withdraw money and save it is somewhat concerning given that many be moving towards low paying cash accounts and limiting their ability to benefit from further tax relief via a pension.

“The findings suggest that this sort of approach is sustainable while people have DB pensions and the state pension to fall back on as a means of providing a guaranteed income in later life. Looking longer term, the number of people who can expect a generous DB income will decline over time and the market needs evolve in a way which helps people understand the different options open to them and the best way to maximise their savings when turning them into a retirement income.”

Bruce Moss, Director of Strategy at EValue comments: “The strong correlation between the preference for flexible income and increasing pension wealth seems very rational – the additional costs associated with flexible income are easier to justify, the risk of variations in the level of the income which is sustainable for life may be easier to shoulder and there is a stronger sense of ownership as pension assets increase. However part of the effect is also due to the fact that men tend to have higher pension funds and are more favourably inclined to flexible income.”

Richard Parkin Head of Pensions Policy at Fidelity International: “The interim report from the FCA on how individuals are using pension freedoms provides some useful insight much of which is already familiar to pension providers. Too often consumers are acting on the basis of poor information or conflating risks in making decisions. The industry has a key role to play in this but cannot solve the problem on its own. Constantly tinkering with pension rules increases complexity and undermines consumer confidence and, as FCA evidence suggests, this can sometimes lead to poor decision making.

Non Advised Drawdown

The FCA is right to look at the rise of non-advised drawdown but this has, in large part, come from customers simply taking tax-free cash. What is important is how these customers use these products in the future and we share the FCA’s desire to extend the guidance and support available to them. We do have to be proportionate in our response though as putting significant controls around drawdown while allowing people to cash out completely without any intervention seems inconsistent.

“Switching” for drawdown

We are also nervous about looking at levels of switching to determine whether customers are making good choices. This is a useful measure for annuities. However, where customers are going into drawdown with their existing provider, they will be doing so in existing workplace pension contracts that will be competitively priced and subject to strict governance. And they will also often just be accessing tax-free cash. We need to ensure people are getting a good deal but measuring this by switching activity alone will not achieve this.

Annuity market

The FCA has rightly recognised the adverse impact of pension freedom on the annuity market. It’s in all of our interests that we have a competitive annuity market and reduced demand for annuities has made it more difficult for firms to compete effectively. With the fall in DB scheme coverage, future generations will likely have greater need to convert savings to guaranteed lifetime income. It is difficult to see what FCA can do about this but it is a real concern.

TFC access and drawdown

We welcome the FCA’s suggestion for individual’s to access tax-free cash without having to switch products though this could be complex to make work within existing rules. In effect, Fidelity offers this to customers today but under current rules has to go through all of the processes that are required for drawdown even though the customer is taking no income. We suggest that this is the area where FCA should focus.

“Overall pension freedom has been a success and allowed people to use their retirement savings in a way that’s best for them. There’s much to do to build on that success and we look forward to working constructively with FCA, government and others to make that happen.”

Darren Philp, Director of policy and Market Engagement at The People’s Pension: “Today’s FCA report on retirement outcomes shows that, faced with a daunting array of options, many are simply cashing in their pensions and potentially getting hit by a triple whammy of a tax bill, missed investment growth and loss of other pension benefits. This fits with findings from the “New Choices, Big Decisions” research from Ignition House earlier this year that shows that most people need either better access to low-cost, trusted advice, tailored decision tools or a regulated default option to ensure they are not sleepwalking into a poorer retirement. Good quality default options will be a vitally important backstop for most people so they know that if they are unable to make a decision, they will still end up with a good solution.”

Anthony Morrow, CEO of robo-adviser “Pensions freedoms are a murky and confusing world for the average person – and billions could be taken out of pensions without the right advice. Unfortunately the traditional pensions industry is happy to take these instructions (and commission) from regular people while overlooking what may or may not be right for the customer. Paying off debt might be a good reason to draw down pensions funds, but in plenty of other scenarios your financial future could be poorer because of a hasty decision now.

“Every year more than 850,000 people turn 55 across the UK, and this figure is only set to rise. So without a careful rethink, pensions freedoms could mean freedom more millions of people to make serious mistakes – mistakes that will likely stay with them for the rest of their lives.”

Tim Middleton, Technical Consultant at The Pensions Management Institute:

“That 30% of DC retirees are going into drawdown without having sought professional advice is grounds for serious concern. The Government should consider making advice mandatory for those with pots in excess of a set threshold. We are moving into an era where an increasing number of people are largely or wholly dependent on Defined Contribution pension arrangements to fund their retirement. Given the growing reluctance of members to opt for the security provided by annuitisation, it is crucial that drawdown is controlled prudently if longevity risk is to be managed effectively.”

Tilney Group:

“Following hot on the heels from its recent market study which identified competitive weaknesses in the Asset Management industry, the Financial Conduct Authority (FCA) has today put he cat amongst the pidgeons again with the release of an interim report on its Retirement Outcomes Review.

The review provides an opportunity to take stock on the radical “pensions freedoms” reforms implemented by the Conservative / Liberal Democrat coalition, which introduced much greater flexibility in how retirees can access their pension pots, sweeping away the requirement to use these to purchase a guaranteed income for life (an annuity).

The FCA’s early findings include:

• accessing pots early has become ‘the new norm’, with 72% of pots accessed before age 65 (mostly as lump sums)
• over half (53%) of pots accessed have been fully withdrawn.
• most consumers (94%) who fully withdrew their defined contribution savings had other sources of income in addition to the state pension
• drawdown has become much more popular

But the FCA has flagged a number of areas of concern which they will attempt to remedy in the final report:

• consumers who fully withdrew their pots did so partly because they do not trust pensions
• most consumers choose the ‘path of least resistance’, accepting drawdown from their current pension provider without shopping around
• many consumers buy drawdown without advice but may need further protection to manage their drawdown effectively
• annuity providers are leaving the open annuity market
• product innovation has been limited

Tilney view

In our view, the pension freedom reforms have been a really positive step forward, allowing much greater flexibility over how savers access their hard earned cash and helping to start the process of rehabilitating the perception of pensions in the eyes of the public. But this is a work in progress and it is right and welcome that the FCA takes stock on how savers are responding to the changed landscape and identify emerging issues early on that may require redress.

The analysis on the actions taken by those crystallising benefits would yield further insights if, in its final report, the FCA were able to provide much more granularity on the trends amongst those who had taken professional advice and those were acting without advice. It is important to note that the FCA has flagged that those who access their pots early without taking advice “typically follow the ‘path of least resistance’ and buy drawdown from pension provider without shopping around which may result in them achieving poorer deals”.  This pretty much echoes previous criticism of failings in the annuities market.

Good advice really adds value and since the introduction of pension freedoms, Tilney’s financial planners have helped numerous savers who were contemplating cashing in their pension pots from inadvertently triggering very significant tax charges as well as help those facing IHT issues understand the attractions of retaining their pensions as a means of passing wealth on efficiently and rethinking their retirement funding strategy entirely by focusing on utilising other assets. For many people, choosing what to do with their pension will be the second most important single financial decision in their lives after the purchase of their home and it really does make sense to do this having taken professional advice – after all, few people would buy a property without using a solicitor.

While sceptics of pension freedoms, who warned of pots being squandered on luxuries, may point to the high number of pensions that have been fully withdrawn, scratch beneath the surface and these are overwhelmingly very small pots. Some 90% of pension pots that have been fully cashed in were less than £30k in value and 60% were less than £10k. Such small amounts would purchase miniscule annuity income streams and would be unsuitable for drawdown, so encashment may well be a rational choice by these individuals, for example to pay off debt.  However, this end of the market will largely fall outside of the scope of professional advice, because of the affordability of fees. It is therefore right that FCA considers whether further protections are required.

Mistrust in pensions – are the politicians listening?

Of concern is that the FCA’s consumer research shows that withdrawals were partially driven by mistrust in pensions, which shows the process of rebuilding faith in the system is a long haul project. In this, policy makers as well as the industry must take their share of the blame.

As we have warned repeatedly, endless tinkering with pension allowances by politicians appears to be a factor here, with the FCA study quoting one respondent “you just don’t know what the Government will do, because they can change the rules at any time”.  Moving the goal posts continually undermines public confidence in pensions, even where changes may not directly impact an individuals because it creates an overall perception of a system in flux.

We hope this is a message that will be clearly be relayed to HM Treasury, who might be tempted to tinker once again with pension allowances and reliefs now the politically weakened Government is under pressure to loosen the fiscal purse strings and find new ways to raise taxes on the affluent. Pensions are mean’t to be long-term savings schemes, not politican’s piggybanks. It is imperative we have a prolonged period of stability in the pensions regime.