FCA to introduce ‘investment pathways’ in radical retirement overhaul

Tom Selby
28 January 2019

The Financial Conduct Authority (FCA) has today set out further details on a range of reforms proposed as part of its ‘Retirement Outcomes Review’.

Investment pathways – key points

·        Providers who offer drawdown without advice will be required to offer ‘investment pathways’ designed to help savers make appropriate retirement choices

·        Pathways will have to cater for four broad retirement scenarios:

o   Those who have no plans to touch their money in the next 5 years

o   Those who plan to set up a guaranteed income (annuity) within the next 5 years

o   Those planning to start taking a long-term income within the next 5 years

o   Those planning to take all their money out within the next 5 years

·        Firms with fewer than 500 members entering drawdown each year will be exempt

·        Providers will have flexibility in setting charges and determining asset allocation, although pathways will need to be presented prominently to customers entering drawdown

Tom Selby, senior analyst at AJ Bell, comments:

“Investment pathways are a major intervention by the regulator so this is going to be an important consultation process.  The key will be on ensuring the investment pathways are capable of matching the needs of consumers selecting each of the four retirement scenarios.  At the moment the proposal is for providers to have to offer just one investment pathway for each scenario.  However, the retirement scenarios are very broad and it is difficult to see how one investment option is going to be able to cover the myriad of needs and risk levels of all the people selecting each scenario.

“Although these pathway options will not be the default for savers, there is a clear intention to nudge consumers towards these options. In attempting to shoehorn savers into four categories with just one investment solution per category, there is a risk some savers could end up in retirement income solutions that do not meet their requirements.

“It also seems odd to exempt smaller firms. If the belief is that pathways will genuinely improve consumer outcomes they should be made readily available to everyone, regardless of the size of the provider they choose.”

Other highlights

·        Anyone investing 50% or more of their pension in cash will need to make an active decision to do so

·        Retirement communications will be given a shake-up, with consumers receiving a simple one-page summary document at age 50

·        Key Features Illustrations (KFIs) will also need to present a simple front-page summary of charges in pounds and pence

Selby continues:

“Clearly investing in cash is likely to prove a detrimental long-term investment strategy, even if those who did so in 2018 are likely to have done better than those exposed to the FTSE 100. It therefore makes sense to require customers to actively choose this path, provided this can be achieved without huge disruption to customers.

“Retirement wake-up packs are long overdue radical reform and today’s announcements represent a step in the right direction. Allowing savers to compare what they pay in pounds and pence on a single A4 sheet of paper is the right approach, as is getting this information to people at 50 rather than 55.

“The next step should be considering whether other retirement information can be culled and replaced with a single-page document.”

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