The Financial Conduct Authority has called for pension providers to offer default investment pathways for those accessing drawdown services without advice.
It is inviting the industry to consult on these recommendations, which are part of its Retirement Outcomes Review.
It has also proposed that pension providers contact members earlier to give information about their retirement options.
The FCA proposes that providers offer four investment pathways, designed to help savers make appropriate retirement choices. This it hopes will reduce the numbers leaving large portions of their pension fund invested in cash.
The pathways are designed to cater for a range of retirement scenarios. These include:
- Those who have no plans to touch their money in the next five years
- Those who plan to buy an annuity within the next 5 years
- Those planning to start taking a long-term income within the next five years
- Those planning to take all their money out within a five year period.
Smaller providers will not have to offer these pathways.
Providers will have flexibility in setting charges and determining asset allocation, although pathways will need to be presented prominently to customers entering drawdown.
The FCA has stated that it may introduce price caps in future, if it deems this is necessary.
The FCA has been concerned about the number of people utilising the new pension freedom rules without advice. These proposals are designed to offer additional support to this group.
However some providers fear that this could further erode the number of people seeking financial advice.
Aegon’s pension director Steven Cameron says these new investment pathways may help non-advised customers avoid poor investment choices, but he points out that if they want to optimise retirement decisions, they should seek more personalised advice.
He adds: “Asking customers entering drawdown to pick from one of four statements around their intentions for the next five years and then setting out a broadly suitable ‘investment pathway’ will be of help to some, and will reduce the number defaulting into cash.
“But we mustn’t give customers the false impression that improved communications or simplified investment pathways replace the benefits of advice. “
AJ Bell’s senior analyst Tom Selby says: “Investment pathways are a major intervention by the regulator so this is going to be an important consultation process.”
He says there are some concerns as to how this might work in practice. “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.
“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.”
However he welcomed the move to improve the ‘wake-up’ packs sent to pension savers.
““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.”
Hargreaves Lansdown head of policy Tom McPhail welcomed this intervention. He says: “The retirement pathways will be immensely helpful to those investors who currently lack the experience and confidence to tailor their retirement investment strategy to meet their changing circumstances.
“The pathways also place a significant duty of care and responsibility on providers to present suitable solutions to their customers.”