The FCA launched its Retirement Outcomes Review (ROR) Market Study in June 2016, in order to explore how the retirement income market had changed since pension freedoms were introduced in April 2015, and to “assess how the market is evolving, to address any emerging consumer harm and to put the market on a good footing for the future”.
Having published an Interim Report in July 2017, the FCA has now published its Final Report, alongside a Consultation Paper, CP18/17, on its proposed packaged of remedies. The FCA is exploring further remedies which it intends to cover in a later consultation paper due in January 2019.
The FCA found that many consumers had welcomed and used pension freedoms, with 1.5 million Defined Contribution pension pots being accessed between April 2015 and September 2017; 72% of pension pots were accessed before the age of 65 with 55% being fully withdrawn. The FCA concluded that the high rate of full withdrawal was linked to a lack of trust in pensions.
Whilst the report is wide ranging in its findings there is a focus on pension drawdown. This follows a material increase in the selection of this option amongst pensioners, with twice as many pension pots now being used to enter drawdown as compared to buying an annuity. A third of those taking drawdown now do so without advice compared to 5% prior to pension freedoms.
The FCA’s other key findings included:
- Many consumers start their retirement income choice with a decision to access tax-free cash which in turn opens up a range of complex decisions;
- Consumers who have recently entered drawdown often do not understand their investment choices. The FCA notes that “around one in three consumers who have gone into drawdown recently are unaware of where their money was invested. Others only had a broad idea.1”;
- Some providers default consumers into cash or cash-like assets in drawdown. As a result, over 33% of non-advised drawdown consumers are wholly holding cash, and the FCA estimates that over half of these consumers are likely to be losing out on income in retirement as a result (on FCA estimates by as much as 37% over a 20 year drawdown period compared to investing in a mix of assets2);
- There is weak competitive pressure and low levels of switching in the non-advised drawdown market (94% stay with their existing provider);
- Drawdown charges are complex, opaque and hard to compare3 which could be a driver of weak competition and switching. Products can have as many as 44 different charges. Overall charges were found to range from 0.4% to 1.6% across seven providers. The FCA has not yet reached a conclusion on whether this indicates charges are too high but notes that drawdown charges are generally much higher than average accumulation charges; and
- An absence of significant product innovation for mass-market consumers.
The FCA also identified ongoing issues with pre-retirement communications and in particular whether the “wake-up pack4” is fit for purpose and issued at the right time. Annuity prompts were also revisited amid concerns that there may be gaps in the current requirements.
The FCA has proposed a number of remedies to address the concerns it identified in the ROR. Some of these are being consulted on as rule changes immediately; whilst others are subject to a request for feedback to see how they might work in practice, particularly for Self Invested Personal Pensions (SIPPs).
The FCA is currently consulting on the following remedies:
- Amending the information that a firm must give in the wake-up packs to include a one page summary. This would be issued for the first time at age 50, and then every five years subsequently until a consumer fully crystallises their pension. The content will vary at different ages: for example, at age 50 a simpler pack, containing only a summary and retirement risk warnings, will be required. Firms will also need to include generic retirement risk warnings within the wake-up packs. The requirements for the reminder communication will also be updated to seek to increase the take up of pension guidance. Marketing material will be prohibited from inclusion in both of these communications;
- The rules around the annuity information prompt (included in quotes) are being updated to improve the effectiveness for those consumers potentially eligible for an enhanced annuity or receiving income driven quotes. This includes requiring firms to collect information about potential eligibility for enhanced annuities;
- Requirements for Key Features Illustrations (KFIs) are being updated to require inflation to be taken into account in drawdown projections and to increase the prominence of charges information. Charges information will need to be provided as a one year pound and pence figure. The requirement to provide charges information and KFIs is being extended to consumers who opt for drawdown within an existing pension product and will also apply when they take income; and
- The rules on ongoing communications for drawdown are being updated so as to require an annual communication even where a consumer has not yet taken income.
This consultation closes on 6 September 2018 and a policy statement is expected in January 2019.
The remedies the FCA is seeking feedback on, including specifically about how they could work for SIPPs, are:
- Requiring firms offering non-advised drawdown to provide consumers with a series of investment pathways to choose from. These would reflect the different objectives consumers could have for their retirement income and simplify investment choices. The FCA is exploring the detail of how these might work in practice and how they could be applied to SIPPs. It is also considering whether to extend the remit of Independent Governance Committees to oversee these investment pathways;
- Preventing firms defaulting consumers into cash or cash like assets in non-advised drawdown. However, the FCA has noted that it needs to explore how this would work for SIPPS and whether exclusions are required; and
- Requiring annual drawdown communications to disclose the actual charges paid by consumers on an annual basis.
The FCA is requesting feedback on these proposals by 9 August and expects to publish a consultation paper in January 2019 followed by a policy statement in July 2019.
Importantly, the FCA has not ruled out bringing in a charges cap for drawdown. It is concerned that consumers may be paying too much for drawdown as competition is not working effectively. Whilst the FCA hopes that the proposed rule changes relating to charge disclosure will help address this, it has stated that it will review charges a year after introducing the investment pathways and, if it finds that firms are charging excessively, it will be highly likely to move towards a charges cap. The FCA acknowledges that it has yet to reach a view on “what the “right” price is” for drawdown but meantime is encouraging firms to challenge their drawdown pricing using the accumulation charges cap of 0.75% as a point of reference.
In addition, the FCA has stated that it would like Government to consider de-coupling the taking of tax-free cash from other retirement income decisions, albeit it recognises that this would be a significant change to the pension tax regime.
Potential Impact for Firms
Whilst the rule changes being consulted on seem less extensive than some of the proposed remedies the FCA is also seeking feedback on, their impact should not be under-estimated. Example of the practical implications for firms include:
- Changing the issuing of wake-up packs could require significant system changes, particularly if legacy systems are involved;
- Re-issuing these packs with changing content depending on the age of the consumer could also raise systems challenges for firms;
- Changes being consulted on for KFIs will also be significant for some firms, especially those who do not have accumulation versions of their drawdown product that already factor inflation into projections.
Firms should start planning for these changes now and assess, and convey to the FCA through the consultation, how long it will take to implement them, so that the FCA can be aware when setting implementation timelines.
The FCA is seeking further feedback on the impact of its proposed drawdown remedies. This could require some firms to revisit fundamentally the design of their products. The oversight and monitoring of investment pathways will also need to be factored into ongoing product reviews and are unlikely to be a one-off task for firms. Firms will also need to consider carefully the role cash assets play in any non-advised drawdown offering they make and in investment pathways.
In our view, firms should not miss the opportunity to provide the FCA with feedback on these proposals, especially those offering full SIPPs on a non-advised basis. Alongside this, firms may wish to consider completing an impact assessment on the FCA’s proposed remedies in order to understand how long changes could take to implement. The overall thrust of the ROR and CP18/17 suggests that the FCA considers that it has broadly identified the right remedies; whilst the detail may yet change to some degree, we think it unlikely the FCA will depart substantially from its proposals.
Whilst the FCA is not going to introduce charges caps for non-advised drawdown at present, it is clearly concerned that charges may be too high, even though it has not yet reached a firm conclusion on this. Consequently, firms may want to consider revisiting the value for money of their non-advised drawdown products, including whether charging structures can be simplified and default options are appropriately priced. The FCA has specifically asked firms to consider the 0.75% accumulation charge cap in doing this: whilst this is not necessarily an indication of what the FCA may eventually conclude is the ‘right price’ for drawdown, it is a clear indication that drawdown is now seen by the FCA as a mass market product and that the FCA will consider the fairness of its pricing very much in that light.
1Page 4 FCA Retirement Outcomes Review Final Report MS16/1.3, June 2018
2See Chapter 4 of the FCA Retirement Outcomes Review Final Report MS16/1.3, June 2018
3Page 6 FCA Retirement Outcomes Review Final Report MS16/1.3 June 2018
4Required under COBS 19.4.5R and issued 4-6 months before retirement date or if request a retirement quote outside of that period.