The FCA has confirmed new rules for non-workplace pensions requiring providers to offer a default fund or “standardised investment solution” to customers who take out non-workplace pensions without the advice.
To assist customers who are having trouble deciding, these regulations mandate that providers present a single default option. Along with the usual alternatives, providers may also present extra investment choices. In many situations, a lifestyling method will be appropriate, according to the guidelines, but businesses are not compelled to use it if they determine that a target market does not benefit from it.
Additionally, warnings will be provided to those who hold more than 25 per cent of their portfolio in cash up to five years prior to the standard minimum pension age but providers may also send additional cash warnings. Businesses affected by these changes must make sure they are compliant by December 1, 2023.
Hargreaves Lansdown senior pensions and retirement analyst Helen Morrissey says: “Many people in non-workplace pensions are more than happy to choose their own investments but for those who don’t have this confidence then the use of default funds can help. Choosing investments may act as a barrier to groups such as the self-employed or those looking to consolidate in setting up a pension and so offering a single default fund will aid decision-making and improve outcomes.
“It is good to see the FCA has listened to industry concerns and there is flexibility baked into the rules. For instance, the rules still give providers the flexibility to develop further solutions for those who are more confident making investment decisions so those who need the support receive it, while others retain the flexibility to choose. We also welcome the fact that it is not mandatory to adopt a lifestyling approach in these funds if it does not meet the needs of the target market.
“The timing and content of cash nudges is extremely important, especially in these times of high inflation. Holding large amounts of cash long-term can have a disastrous effect on someone’s retirement plans and it is important the appropriate warnings are put in place to make people aware.
“The FCA has given guidelines for what must be included in these warnings -we believe that as data capture and technology improve, we can further innovate in this area with the provision of more dynamic tailored warnings to customers in future.”
Aegon pensions director Steven Cameron says: “In current times of record high inflation, holding cash over any longer time period will lead to a loss of value in real terms. We support the new requirements for firms to send additional communications to customers who have more than 25 per cent of their funds in cash for 6 months or more. However, these need to be balanced with an explanation of when cash holdings may serve a purpose and also that investing isn’t risk-free. They also need to be responsive to future patterns in cash-saving interest rates and inflation.
“The rules will require firms to provide generic illustrations of how much a £10,000 investment will lose in value over 10 years. The rules require this to be based on a 0 per cent interest and on the ruling rate of Consumer Price Inflation. With the Office for Budget Responsibility predicting a sharp fall in inflation in coming years, basing a 10-year projection on current historic highs could be very misleading.
“Similarly, using a 0 per cent interest rate when cash savings rates have risen and are expected to continue to do so again seems overly pessimistic. Furthermore, the OBR expects inflation to be negative in some future years, which would mean even with 0 per cent interest, cash savings would grow in real value. This raises major questions over what a warning about the ‘dangers’ of inflation for cash savers would look like then.
“The FCA has left it for each firm to decide if based on market conditions they believe it is ‘the wrong time’ to issue a cash warning. This will be very challenging at a time when few can predict where markets will move next. Deferring a communication for 3 months might benefit some customers if they then didn’t move out of cash before a market fall. But if markets actually rose, deferring investing could mean some customers lose out, leaving providers open to being judged with the benefit of hindsight.”
AJ Bell head of retirement policy Tom Selby says: “With inflation in the UK now topping 11 per cent and expected to stay high well into 2023, ensuring savers with a long-term time horizon invest their money sensibly – in part to combat the deleterious impact of rising prices – is of paramount importance.
“While non-advised customers who choose to invest in a non-workplace pension are more likely to be engaged than people who are automatically enrolled into a workplace pension, there remains a risk some will either subsequently become disengaged or struggle to make good choices about where to invest their pension.
“Making investment choices simpler and providing nudges where potentially poor decisions are being made could therefore lead to more people having bigger retirement pots.
“Having a simple default fund solution could be a useful part of the non-workplace infrastructure, but it was important firms were given flexibility to design such a solution to meet the needs of their customers.
“It is therefore welcome that the FCA has acknowledged this in its policy statement and backed down from proposals to essentially mandate ‘lifestyling’ in these default strategies.
“For SIPP customers, it makes much more sense to use communications tools to encourage people to think about their investment strategy as they move from the saving for retirement phase to taking an income from their pension. It is positive, particularly with the Consumer Duty being introduced, that the regulator has acknowledged the importance of giving firms the freedom to design suitable products for their customers.”