Experts comment on the FCA’s new rules for non-workplace pensions

by | Dec 1, 2022

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Money jar with pension written on
  • Non-advised savers in non-workplace pensions, such as SIPPs, will be offered a single default investment option under reforms confirmed by the Financial Conduct Authority (FCA) today (PS22/15: Improving outcomes in non-workplace pensions – feedback on CP21/32 and our final rules and guidance (fca.org.uk))
  • The FCA has backed away from plans to mandate these default funds incorporate ‘lifestyling’, whereby investments are automatically shifted into lower-risk investments ahead of an assumed retirement date
  • Cash warnings will also need to be issued to pension customers with “significant and sustained” cash holdings in their portfolio
  • Regular cash warnings will need to be given where:
    • More than 25% of the person’s pension is held in cash or cash-like investments
    • The amount of the cash holding is greater than £1,000
    • The saver is more than five years away from being able to access their pension pot
  • These reforms will be introduced for non-workplace pension customers in 12-months’ time

Tom Selby, head of retirement policy at AJ Bell, comments:

“With inflation in the UK now topping 11% and expected to stay high well into 2023, ensuring savers with a long-term time horizon invest their money sensibly – in part to combat the deleterious impact of rising prices – is of paramount importance. 

“While non-advised customers who choose to invest in a non-workplace pension are more likely to be engaged than people who are automatically enrolled into a workplace pension, there remains a risk some will either subsequently become disengaged or struggle to make good choices about where to invest their pension.

 

“Making investment choices simpler and providing nudges where potentially poor decisions are being made could therefore lead to more people having bigger retirement pots.

“Having a simple default fund solution could be a useful part of the non-workplace infrastructure, but it was important firms were given flexibility to design such a solution to meet the needs of their customers.

“It is therefore welcome that the FCA has acknowledged this in its policy statement and backed down from proposals to essentially mandate ‘lifestyling’ in these default strategies.

 

“We have seen recently how supposed ‘de-risking’ strategies can lead to terrible outcomes for pension savers, with those in lifestyling funds trending towards annuity purchase wearing huge losses in 2022 as bond prices have tanked.

“The idea of lifestyling towards a set retirement date simply doesn’t work for those who aren’t planning to buy an annuity, because most people access their pensions flexibly at different ages and in different ways. Ultimately, taking a flexible income through drawdown requires engagement.

“For SIPP customers, it makes much more sense to use communications tools to encourage people to think about their investment strategy as they move from the saving for retirement phase to taking an income from their pension. It is positive, particularly with the Consumer Duty being introduced, that the regulator has acknowledged the importance of giving firms the freedom to design suitable products for their customers.”

 

Cash warnings

“We agree with the intention behind the FCA’s plans to require communications to be sent to non-workplace pension savers who hold large chunks of cash for long periods of time. Holding too much of your pension in cash can lead to disastrous outcomes, particularly over the long-term.

“Take someone who has a £50,000 fund invested in cash paying 0% interest over 20 years. If inflation runs at 2% a year over that period – the Bank of England’s official target and well below what we are seeing at the moment – in ‘real’ terms it will be worth just over £33,000.

 

“To put that another way, the corrosive power of inflation will have reduced the value of their pension by over a third.

“While we would have preferred a less prescriptive approach than that put forward by the FCA today, we look forward to working with the regulator to ensure implementation is as smooth as possible in what is a challenging timescale.”

Steven Cameron, Pensions Director at Aegon, comments:

 

“In current times of record high inflation, holding cash over any longer time-period will lead to a loss of value in real terms. We support the new requirements for firms to send additional communications to customers who have more than 25% of their funds in cash for 6 months or more.  However, these need to be balanced with an explanation of when cash holdings may serve a purpose and also that investing isn’t risk free. They also need to be responsive to future patterns in cash saving interest rates and inflation.

“The rules will require firms to provide generic illustrations of how much a £10,000 investment will lose in value over 10 years. The rules require this to be based on a 0% interest and on the ruling rate of Consumer Price Inflation. With the Office for Budget Responsibility predicting a sharp fall in inflation in coming years, basing a 10 year projection on current historic highs could be very misleading. Similarly, using a 0% interest rate when cash savings rates have risen and are expected to continue to do so again seems overly pessimistic. Furthermore, the OBR expects inflation to be negative in some future years, which would mean even with 0% interest, cash savings would grow in real value. This raises major questions over what a warning about the ‘dangers’ of inflation for cash savers would look like then.

“The FCA has left it for each firm to decide if based on market conditions they believe it is ‘the wrong time’ to issue a cash warning. This will be very challenging at a time when few can predict where markets will move next. Deferring a communication for 3 months might benefit some customers if they then didn’t move out of cash before a market fall. But if markets actually rose, deferring investing could mean some customers lose out, leaving providers open to being judged with the benefit of hindsight.”

 

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