6 August 2019
It’s over 4 years since pension freedoms were announced and since then DC savers have been plunging into the murky and complicated world of DC drawdown solutions, primarily to get their hands on their tax-free cash.
As a result, many DC savers unintentionally end up being transferred to more expensive products designed for the retail market or remain in their provider’s default strategy. Either way, the result is that the investment solutions are commonly not aligned to the DC saver’s needs for the future. This situation has been made worse by the large proportion of DC savers who are reluctant to pay for advice.
The FCA has come to a similar conclusion, finding that, shockingly, around one in three consumers who have gone into drawdown recently are unaware of where their money is being invested. As a result, the FCA has finally called time on this particular experiment, acknowledging that savers are not likely to get the best deal from their DC provider under the current rules.
The FCA has recently issued its policy statement from its Retirement Outcomes Review, setting out new rules on:
- Introducing ‘investment pathways’ for savers entering drawdown without taking advice;
- Ensuring that savers entering drawdown invest predominantly in cash only if they take an active decision to do so; and
- Giving savers in decumulation annual information on all the costs and charges they have paid.
Investment pathways is the big talking point from the outcomes of the review. Providers will now need to offer members a single investment solution for each of four objectives that will be offered to members at the point that they look to access their pension savings
The four options are:
- Option 1: I have no plans to touch my money in the next 5 years.
- Option 2: I plan to use my money to set up a guaranteed income (annuity) within the next 5 years.
- Option 3: I plan to start taking my money as a long-term income within the next 5 years.
- Option 4: I plan to take out all my money within the next 5 years.
The thinking behind this is it will improve outcomes for savers as they will be required to choose an option rather than be defaulted into a single solution that is not aligned with their needs. The FCA has not prescribed what these new solutions look like and existing solutions may be used, so it’s possible that the investment options remain very similar to as they were before.
Having already spoken with a number of providers about the new rules I am encouraged to see providers using this as an opportunity to develop new complementary solutions rather than reaching for the existing catalogue of options available. Hopefully this means that savers not only have clearer range of options to choose from but also more comparable options which will drive competition in this market which can only be a positive for .
Of course, given these rules have been set by the FCA, they only apply to contract-based arrangements and Master Trusts are not caught by this yet. I would be surprised, and disappointed, if this remains the situation for long and hope that Master Trusts develop these solutions and own trust schemes look to partner with providers who can help their members in drawdown.
Read more about the FCA’s rules and guidance in our latest Pensions Bulletin.
LCP DC Quarterly Update
What's on the horizon for defined contribution pensions? In this edition of our DC update, we look at key market updates from the past quarter, and how DC default design should evolve in a post-Covid-19 world.Read the update