The FCA recently published a package of measures to address the potential harm it found during its Retirement Outcomes Review (“ROR”). The package includes:
- a consultation aimed at improving outcomes in the drawdown market including the introduction of ‘investment pathways’ to help non-advised consumers choose the best way to invest their money; and
- final rules and guidance aimed at improving the information consumers receive in the lead-up to, and after, accessing their pension savings.
Alongside other measures, the proposed ‘investment pathways’ represent a significant intervention in the retirement market and highlight the FCA’s increased willingness to become involved in areas such as product design and value for money in order to address potential harm to consumers or market failures. Firms should pay particular attention to the FCA’s statement that is “highly likely” to consider a charge cap for investment pathways if it concludes consumers do not receive value for money.
This blog summarises key aspects of the FCA’s package of measures and sets out the key implications for firms.
CP19/5: Investment pathways and other proposed changes
The FCA is concerned that non-advised consumers who decide to access their pensions through drawdown are insufficiently engaged with, and informed about, their decision. It is consulting on introducing four ‘investment pathways’ that will help non-advised consumers choose how to invest their drawdown pot, on the basis of the objectives they have for that money.
Firms will be required to offer a minimum of two pathways to consumers moving all or some of their pension savings into drawdown (or moving funds between drawdown arrangements) without advice. Firms who do not offer all four pathways will need arrangements to refer consumers to other firms.
Whilst the objective of each pathway will be set by the FCA, firms will be responsible for choosing the investments that sit behind them and cannot use the same investment exposure for more than one pathway.
A summary of the FCA’s proposals for investment pathways is set out in Appendix A.
The ROR found that many non-advised drawdown consumers were losing out on retirement income because their pension pots in drawdown were invested in cash, even though they did not intend to spend the money in the short-term. The FCA is, therefore, also consulting on proposals to ensure that customers make an active decision to invest wholly or predominantly in cash and to prevent firms defaulting customers into a pathway that invests in over 50% cash or cash assets.
Where customers do invest in a pathway that has more than 50% cash or cash assets, firms must provide warnings about the likely impact on their long-term income, both when they enter drawdown and on an ongoing basis. Firms will also be required to provide these warnings to customers who entered drawdown prior to the rules coming into effect and will have a six month window to complete this exercise.
Actual Charges Information
To ensure a more competitive drawdown market, the FCA is also proposing that personal and stakeholder pension providers be required to provide annual costs and charges information including transaction costs to customers. This must be expressed as a cash amount in pounds and pence in aggregate.
The method of calculating transaction costs will not be mandated and the FCA recognises these may be estimated. It is also noted that this will increase the overall charge disclosed as compared with the Key Features Illustration (“KFI”), which does not include transaction costs.
PS19/1 Feedback on CP18/17 and final rules and guidance
Alongside CP19/5, the FCA published final rules and guidance aimed at improving consumer engagement with retirement income decisions. In summary, the key changes are:
- The wake-up pack requirements have been amended to require issue from age 50, and every five years thereafter until the pension fund is fully crystallised, with the age 50 pack being an abridged version.
- The annuity information prompt is being updated to require firms to assess a customer’s eligibility for an enhanced annuity and use this information to obtain a market leading quote.
- The requirement for a KFI is being extended to include where someone uses an existing product to move funds into drawdown, withdraws pension income for the first time (if this happens at later date), or withdraws their first Uncrystallised Pension Fund Lump Sum (UFPLUS) payment. A front page summary is also being required for the KFI which will include a first year single charge figure in pounds and pence and uses real (i.e. inflation adjusted), not nominal figures.
The changes come into force in November 2019.
Implications for firms
Firms offering non-advised drawdown will need to adapt their product offerings to introduce the investment pathways. Careful consideration will be needed in the following areas:
- Determining the investments within each pathway objective and the risk profile customers will be exposed to. Firms who do not get the risk appetite and investment selections right for their target market could be exposing their customers, and therefore the firm itself, to greater risk.
- Specific consideration should be given to the level of cash exposure in each objective, as the FCA is concerned that inflation may erode the value of investments if consumers do not intend to drawdown their funds quickly.
- In considering the investment strategy for each pathway, firms should have particular regard to the balance between cash and other riskier assets and the extent to which consumers are exposed to particularly risky assets.
- Firms should give serious consideration to the value for money of their drawdown offerings. The FCA has reiterated its intention to review charges in drawdown one year after the implementation of the pathways (i.e. July 2021) and challenged firms to use the 0.75% charges cap for default arrangements in accumulation as a benchmark against which to justify their charges.
- Firms will thus need to examine why any charges are greater than the 0.75% charge cap and be prepared to explain and evidence the extra value that is being offered to justify the cost.
- The remit of Independent Governance Committees (“IGCs”) is going to be extended to cover investment pathways. As the details of the IGC role will not be consulted on until April, in order to avoid a governance delay in the development process, firms may need to work from the proposals set out in the IGC consultation paper once published, rather than waiting for final rules.
- Firms will also need to consider if their IGCs have sufficient time and skills under current arrangements to perform their new duties.
- The FCA is proposing amendments to SYSC to set out in guidance a non-exhaustive list of the information it expects firms to have and has stated that it will be making regular data requests to providers to inform its post-implementation review and firms will need to prepare for this.
- Whilst the final rules issued in PS19/1 may not seem as significant as the proposals in the investment pathways consultation, firms should not delay assessing them.
- Issuing additional wake-up packs may require system changes that, on legacy systems, may not be straight forward. System changes for KFIs or the annuity prompt may also take time to implement, which could leave a short window for the design phase.
Further considerations for firms
- The FCA is planning a 12 month implementation period for its investment pathways proposals (a policy statement is expected in July 2019). This is a tight timeframe given that firms will already be making changes to meet the requirements of PS19/1, and system and product design changes will be needed in many cases.
- With all of the changes being implemented between November 2019 and July 2020, firms should take a step back and consider their customer journey as a whole to avoid piecemeal amendments that provide a cumbersome customer experience. Crucially, this re-design process provides an important opportunity for firms to refresh their approach to vulnerable customers through the product development process and within any updated customer journeys.
Appendix A: Summary of the FCA’s proposals for investment pathways
- Firms will be required to offer a number of specified investment pathways to consumers moving all or some of their pensions savings into drawdown or moving funds in drawdown into a new drawdown arrangement without advice
- The FCA has defined when a customer has not taken advice
- The investment pathways need to be offered for the following objectives (the wording is mandated by the FCA):
- OPTION ONE: I have no plans to touch my money in the next five years;
- OPTION TWO: I plan to use my money to set up a guaranteed income (annuity) within the next five years;
- OPTION THREE: I plan to start taking my money as a long term income in the next five years;
- OPTION FOUR: I plan to take out all of my money within the next five years
- Firms may only offer one pathway per objective
- If a customer is moved into a pathway without an active decision it cannot be wholly or predominantly invested in cash (defined as over 50% in cash or cash like assets)
- Firms can offer other investment options and self-select funds but they cannot make these more prominent than the pathways, cannot present them alongside the pathways and cannot name any other investment choices in a way that could suggest they are a pathway
- The perimeter guidance in PERG is being updated to set out how firms can use case studies and descriptions to support the pathways without straying into advice
- If a customer decides not to invest in a pathway they must be offered it for a second time and firms must present a shopping around message when offering any investment solutions to customers
- Firms cannot use the same pathway for multiple objectives and larger firms must offer at least two out of four objectives and refer to another provider for any they do not offer
- There is a small firm easement for firms that have less than 500 non-advised drawdown customers a year and this allows them not to offer the pathways but refer customers to another firm or the Single Guidance Body (“SGB”) drawdown comparator tool which should be launched by the time this requirement is implemented. Firms will be required to assess at least annually if they still meet the eligibility for this and will have a six month period to implement pathways if the easement ceases to apply
- PROD 4 is being extended to cover manufacturers of pathways and a new chapter is being added to PROD to cover the review of the investment pathways which needs to happen at least annually (referrals need to be reviewed every two years)
- There is an ongoing communication requirement every five years if a customer does not change pathways.