The FCA has just released three papers aiming to protect pension savers and retirees; Nathan Long, senior analyst at Hargreaves Lansdown, has examined them all and gives us his reactions.
Retirees are covered in the ‘Retirement Outcomes Review Policy Statement’. The final rules protecting retirees concern income drawdown, a riskier way of drawing from a pension that has become more popular following falling annuity rates and greater pension freedom. They will:
Introduce ‘investment pathways’ for consumers entering drawdown without taking advice;
Ensure that consumers entering drawdown invest predominantly in cash only if they take an active decision to do so;
Give consumers in drawdown annual information on all the costs and charges they have paid.
Long comments:
‘The regulator has put the finishing touches on its rules to protect the army of people now choosing to stay invested throughout their retirement. It’s great that retirees are not being left out in the cold, but a more homogenous pension provision will have unintended consequences. Drawdown is a riskier way of drawing from your pension, involving two conundrums; where to invest and how much income to draw, the latter is absent from the remedies.
People should only choose drawdown if they are sure of the risks involved, there’s a danger these rules prompt more people to sleepwalk into uncertainty rather than opting for a guaranteed income. Ultimately, the best outcomes in retirement will still come from people engaging more with their pension before, at and during retirement’
Final salary pensions are covered in the consultation document ‘Pension transfer advice – contingent charging and other proposed changes’.
The highlights include:
Banning contingent charging on defined benefit transfers. This is where advisers only get paid if the individual goes ahead with a transfer of a pension;
Providing access to abridged advice which is an ‘advice-light’ service so people are not left paying full advice fees unless there is a realistic chance their circumstances can be improved;
Ensuring ongoing conflicts of interest are managed by strengthening the requirements to consider existing workplace pensions and not locking people into expensive ongoing servicing if it’s not required.
Long’s view on this is:
‘It’s rare that transferring a defined benefit pension is the best course of action, so banning contingent charging for this type of advice seems sensible. The challenge will be in making sure those for whom it could make sense have access to advice. This type of specialist advice is very complex and tends not to be cheap, which is why the FCA are considering an advice-light service to help people understand if even taking further advice would be worthwhile. It’s telling that the regulator is also focusing on people being defaulted into advice services that don’t offer value for money, as most people only really need advice at the point their finances become too complex for them.’
The self-employed saving in non-workplace pensions are covered in the feedback statement ‘Effective competition in non-workplace pensions’.
They’re looking for feedback on measures to introduce default funds to protect consumers who do not or cannot engage with their investment decision, and to introduce simpler, more transparent charges.
Long observes:
‘The regulator has found little competition in pensions offered outside of work, with high costs for smaller and older style pensions. Current users of pensions that aren’t offered through work will largely be those who are consolidating their pensions to take better control and the self-employed, both of whom will benefit from pensions of a similar standard to workplace pensions. It’s the pensions set up many years ago that tend to have higher charges, don’t have online access and lack quality information to drive higher levels of understanding.
The focus on costs is understandable, but overall it’s the outcome for clients that’s most important. Providers that help clients to understand how much they should save, make appropriate investment choices, manage their money on the run into retirement and appropriately access their pension are those that will deliver their clients a more comfortable retirement.’
