The Financial Conduct Authority (FCA) has determined that investment pathways introduced in February 2021 for consumers entering drawdown without taking advice are “working as intended” but more needs to be done to assist people in making decisions.
The FCA has published its post-implementation review of investment pathways which comprises of analysis of market trends in the pensions sector, research on the uptake and operation of investment pathways, analysis of publicly accessible industry data, and qualitative responses to the Department for Work and Pensions’ (DWP) request for evidence on the subject of assisting savers in understanding their pension options.
Investment pathways were introduced primarily to address specific issues identified in the Retirement Outcomes Review (ROR). This includes assisting non-advised drawdown consumers who find it difficult to choose an investing strategy and consumers who want to access their tax-free funds. The FCA says that some of these providers were “defaulting” consumers into cash or assets that resemble cash.
The FCA says it wants to make sure consumers who are entering drawdown only invested primarily in cash if they take an active decision to do so. Additionally, the FCA required that businesses notify consumers who have accessed their pensions annually of all the fees and levies they have paid in the previous year.
According to the review, initial take-up data is encouraging but varied across different providers. The FCA suggests reasons such as the specific markets served by different providers, how firms communicate investment pathways and whether firms require consumers to use investment pathways.
The FCA says that it recognises that more needs to be done to assist consumers in making decisions and that there has to be a comprehensive approach to helping consumers at every stage of their journey. It also adds that it intends to collaborate closely with the DWP and The Pensions Regulator (TPR) to ensure alignment within the pensions market.
The FCA adds that the collaboration aims to advance its ideas and regulatory initiatives in this field, which encompasses the ongoing review of the advice/guidance boundary in conjunction with the Treasury.
This review comes after the DWP published its response to the request for evidence on “helping savers understand their pension choices” about the products and services section. This consultation will also cover a policy framework to “support individuals use their pension savings in decumulation.”
Quilter head of retirement policy Jon Greer says: “How you access your pension savings is one of the most important financial decisions you will ever make, particularly in light of pension freedoms and the increasing prevalence of defined contribution pension schemes, so it is positive to see the Financial Conduct Authority’s investment pathways have been well received by those that need them most.
“Introduced in February 2021, investment pathways intended to address the difficulties people experienced when accessing their funds. Savers going into drawdown face a dizzying array of decisions and challenges, which is compounded if they are unadvised, and investment pathways are having a positive impact in terms of helping people navigate these decisions at what is such a critical point.
“While this is a good starting point, the FCA has recognised that it needs to take a more holistic view of how it can best support consumers through their pensions journey. A close working relationship with the Department for Work and Pensions and The Pensions Regulator will be key to ensure that members receive support to achieve good outcomes regardless of the type of scheme they are in.
“The FCA’s post-implementation review comes as the DWP launches its own consultation today to help savers understand their pension choices. Decumulating from a pension can be challenging, particularly without professional financial advice, so it is important that the FCA and the DWP work closely in this area.
“While initiatives such as investment pathways make it easier for non-advised savers to choose investment solutions aligned to their specific desires and drawdown objectives, they are no substitute for financial advice. Everyone’s financial make up is different as well as their financial objectives, and advice often helps those who live well below their means for much of their retirement unnecessarily by illustrating exactly how much they can afford to drawdown without fear of running out.”
