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FCA unveils plans for non-workplace pensions ‘default’ funds

Tom Selby, senior analyst at AJ Bell
  • Savers in non-workplace pensions will be offered automatic enrolment-style ‘default’ funds under plans revealed by the Financial Conduct Authority (FCA) today (CP21/32: Improving outcomes in non-workplace pensions (fca.org.uk))
  • Default funds will need to be offered to customers at the point they open a product and when they make their first contribution
  • Unlike in auto-enrolment, non-workplace default fund charges will not be capped – although this will be reviewed
  • Extra risk warnings will also need to be put in place for customers who hold more than 25% of their pension in cash for more than 6 months

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

“With inflation threatening to rampage through the economy, ensuring savers with a long-term time horizon invest their money sensibly is hugely important.

“While people who choose to invest in a non-workplace pension have by definition exhibited a level of engagement, there is a risk that some will either subsequently become disengaged or struggle to make good choices about where to invest their hard-earned retirement pot.

“In a worst-case scenario, they will end up shoving all their pension in cash and risk their money being eaten away by inflation.

“Having a default fund which is broadly suitable while also issuing warnings to those who invest in cash over long time periods could therefore help improve outcomes.

“Care will need to be taken in ensuring engaged customers who were planning to build a retirement portfolio based on their circumstances are not encouraged to instead simply go for the ‘easy option’ of investing everything in a single default fund that might be less appropriate.

“The FCA has taken a pragmatic approach to how the default fund should be offered to people, insisting only that it should be ‘prominent’ in communications, and allowed for flexibility in the design of such funds.

“This should help ensure the reforms are introduced in a way which can genuinely help savers.”

Lifestyling

“We disagree with the regulator’s assertion that ‘lifestyling’ – a concept based around reducing the risk of investments as people approach a selected retirement date – is likely to be appropriate for most people.

“The majority of savers now choose to enter drawdown and stay invested in retirement, and so reducing risk ahead of this point will make little sense in many cases.

“Indeed, the idea of basing your investments around a set retirement date ignores the fact retirement is flexible for many people, rather than a specific point in time.”

The impact of inflation

“Inflation is an eroding force on people’s retirement pots, particularly when they invest in cash 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 – 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.”

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