The FCA opened a consultation this morning into the provision of default funds for non-workplace pensions requiring them to offer default option.
The FCA proposes that non-workplace pension providers provide a ‘default’ investment option to new non-advised customers and issue cash warnings to customers who have sustained and potentially inappropriate cash levels in their non-workplace pension.
But AJ Bell has challenged the FCA’s proposal that non-workplace defaults should include lifestyling, arguing most will go into drawdown, making this irrelevant.
The proposals will primarily be of interest to non-workplace pension providers, such as life insurers, platform providers, and self-invested personal pension operators. Other stakeholders with an interest in non-workplace pensions, such as industry associations and trade bodies, independent governance bodies, asset management firms, individuals and firms providing advice and information in these areas, consumer representative groups and charities, and other organisations with a particular interest in the ageing population, should be aware of the proposals.
The regulator said: “Currently, consumers buying and saving into a non-workplace pension have to choose their own investments from an increasingly wide range of options. This complexity can make it hard for some consumers who do not take advice to choose investments that meet their retirement needs. They may end up with investments that are not appropriately diversified and with too much or too little risk. In addition, more consumers are now buying non-workplace pensions without advice.
“As well as poorly chosen baskets of investments, we are concerned that some consumers hold cash in their non-workplace pension. Over the long term, cash holdings are at risk of being eroded by inflation. Investing in growth assets rather than cash is likely to deliver a larger pension pot at retirement.”
AJ Bell head of retirement policy Tom Selby says: “While people who choose to invest in a non-workplace pension have by definition exhibited a level of engagement, there is a risk that some will either subsequently become disengaged or struggle to make good choices about where to invest their hard-earned retirement pot. In a worst-case scenario, they will end up shoving all their pension in cash and risk their money being eaten away by inflation. Having a default fund which is broadly suitable while also issuing warnings to those who invest in cash over long time periods could therefore help improve outcomes.
“Care will need to be taken in ensuring engaged customers who were planning to build a retirement portfolio based on their circumstances are not encouraged to instead simply go for the ‘easy option’ of investing everything in a single default fund that might be less appropriate.
“The FCA has taken a pragmatic approach to how the default fund should be offered to people, insisting only that it should be ‘prominent’ in communications, and allowed for flexibility in the design of such funds. This should help ensure the reforms are introduced in a way which can genuinely help savers.”
“We disagree with the regulator’s assertion that ‘lifestyling’ – a concept based around reducing the risk of investments as people approach a selected retirement date – is likely to be appropriate for most people.
“The majority of savers now choose to enter drawdown and stay invested in retirement, and so reducing risk ahead of this point will make little sense in many cases.
“Indeed, the idea of basing your investments around a set retirement date ignores the fact retirement is flexible for many people, rather than a specific point in time.”
Phil Brown, director of policy at B&CE, provider of The People’s Pension, says: “The risks to non-advised savers in retail pensions are very similar to the risks facing savers in workplace pensions but workplace pensions are better set up to protect consumers and are subject to a more stringent consumer protection regime. So, it’s not a surprise that the FCA is considering tougher regulation, including the formal introduction of default funds for non-advised customers buying non-workplace pensions.
“Pseudo-defaults exist in the market right now, so regulation is appropriate. It’s disappointing, though, that the paper falls short of proposing an extension of Independent Governance Committees (IGCs) and a charge cap for non-workplace pension default funds.
“One of the lessons of automatic enrolment is that default funds need independent governance. It’s odd that the same default fund offered by a workplace pension would benefit from tougher consumer protection than an identical fund sold in a retail product. ”
Interactive Investor head of pensions and savings Becky O’Connor says: “It’s really important that investors who want to do it themselves feel free to do so, while those that need a helping hand can access this, too.”
“You don’t have to be an investment whizz to use a Self-invested Personal Pension. Interactive investor offers a range of six ‘Quick-start’ funds, which are low cost, ready-made investment portfolios, including three ethical options, based on different risk levels and giving a choice of active or passive strategies, which pension investors can use.
“It is true that there is a huge choice of funds, trusts, ETFs and direct equities out there for those who want to make their own choices. Investors can also face choices between different asset classes, geographies and themes. That’s why access to good research and education is so important. For some confident investors, this ability to make their own informed choices, based on their own goals and timeframes, is the appeal of a Sipp.
“On the risk of cash, generally speaking, Sipp investors do not hoard cash. They hold a slightly higher proportion than ISA and trading account customers on interactive investor. They can hold cash for a variety of reasons, for example, taking opportunities in the market.”