As with several other regulatory initiatives, the implementation of investment pathways has been delayed due to Covid-19.
The reform had been due to come into force in August, which would have meant investors following the new investment pathways would have missed the worst of the Covid downturn, which troughed towards the end of March, sparing the blushes of a regulator that had just a few months earlier been complaining of excessive cash holdings amongst retiring pension savers.
The new start date is 1st February 2021. When they finally arrive the pathways are designed to offer – in the FCA’s words – ‘ready-made investment solutions’ to the estimated 100,000 customers who enter drawdown without taking advice each year.
For larger providers, customers are to be given a choice of four pathways to be determined by the objective of their retirement pots. Smaller providers without this offering will be expected to refer investors to another provider offering these four pathways or to the Money and Pensions Service for guidance.
The pathways will be dependent on a person’s retirement plans. Option one: I have no plans to touch my money in the next five years; Option two: I plan to use my money to set up a guaranteed income (annuity) within the next five years; Option three: I plan to start taking my money as a long- term income within the next five years; Option four: I plan to take out all my money within the next five years.
Providers will also be required to issue consumers with warnings about holding investments in cash making the decision to do so an active one.
Firms are also expected to improve their disclosure of charges with the suggestion that if charges remain too high, the FCA will consider a charge cap.
However, as it has done with so many things, Covid-19 has intervened.
In March and April, the FCA decided that several reforms could be delayed, and pathways have been included in this. This was partly due to the restrictions of lockdown and partly to allow it to address issues of relevance to the immediate crisis.
The immediate measures included significant interventions in the pensions market.
The FCA was greatly concerned with poorly considered, potentially unsuitable, defined benefit pension transfers occurring during the crisis, with parallel and often complementary work from the Pensions Regulator, such as allowing DB schemes to suspend transfers.
The FCA also suggested that pension providers warn their investors about certain actions, most ly assoc i a t e d w i t h withdrawing money or reacting to difficult markets by changing investment strategy.
These warnings were deemed to “apply in the exceptional circumstances of the coronavirus pandemic and its impact on pension savers”.
These included, for example, warning clients that “making decisions about your pension based on short term circumstances – especially at a time of market volatility – can have significant ong-term consequences for your financial wellbeing and retirement.” t also drew accumulation and drawdown providers’ attention to the client’s best interest rule regarding those customers who wanted to derisk, suggesting that where “a provider is concerned that a customer is making a decision that is not in their best interests, bringing this up with the consumer would be in keeping with its obligations”.
With the FCA suggesting additional crisis warnings designed to dissuade pension investors from damaging actions, this begs the question how would the various pathways have performed?
Given we are now hopefully post-rebound, it is hypothetical, but one scenario stands out. It could be argued those who were prompted not to stay in cash would have had an incredibly torrid end to February and March, whatever subsequent warnings their pension provider was urged to give.
That said, significant ground would then have been made up in the second quarter, though the recovery in the FTSE 100 has been much less than US and global indices.
But these sorts of scenarios have prompted some to suggest a longer pause than the six-month delay.
AJ Bell senior technical consultant Rachel Vahey says: “We have had severe misgivings on investment pathways. We realise and appreciate the reasons why the FCA has introduced this regulation. Large numbers of non-advised drawdown customers are unsure of where their pension fund is invested and often the investment solutions they choose don’t align with objectives for retirement. Also, too many are invested’ in cash without this being an active decision.
“However, there is a disconnect between the issues investment pathways are addressing, the solutions proposed and the way the industry works. The FCA solutions are designed to work for insured personal pensions and to solve a problem inherent in insured personal pensions – they don’t work comfortably for Sipps and many platform problems. We are concerned they won’t solve the problem the FCA is seeking to address. And this problem is not, in any case, as significant in Sipps and platform pensions.”
She also believes that the crisis should have changed some of the emphasis of the debate.
“The Covid-19 and resulting bear market has only emphasised the issues with the regulations. The fact that investment pathways in their current guise are outcome focused and not risk targeted is a major flaw. If they had been implemented six months ago there would be thousands of drawdown customers looking at heavy investment losses with little understanding of why they were guided down a particular path. It’s important that people’s investment portfolios are aligned to their personal risk appetite, particularly when they are drawing an income.
“We are a long way down the road now with implementing investment pathways. However, it’s still not too late for an imm ediate d el ay of the implementation of investment pathways to give time for a fundamental rethink of what the FCA is trying to achieve and the best way to implement them.”
Some experts and advisers back this view. Billy Burrows, retirement director at the Better Retirement Group says: “This is a big step and we shouldn’t rush into it. The truth is that the future is so uncertain, that it makes sense to take stock given what has happened.”
CanScot Solutions principal Robert Reid also has concerns. He says: “I think it is a strange prescription, because you have a generic term for something that is non-generic. That always worries me.
“There is so much wriggle room for the various portfolios. You could have four people with exactly the same pathway, but with totally different performance. Then you will start to get a lot of questions asked.
“What they should have done is come up with a prescriptive allocation and I think the Sipp providers would be a lot happier with that. They are all trying to second guess things.”
Yet many experts say the reforms should press ahead.
The Pensions Management Institute’s director of policy and external affairs Tim Middleton says: “We have had plenty of delays. Think about the development of various consumer products – would you have delayed the launch of the iPhone 1 because you knew we were going to have the iPhone 5?
“My view is that we should go ahead now in the knowledge that there will be incremental changes and improvements in the future. There has to be a starting point somewhere.”
PTL managing director Richard Butcher says: “I think we need to press ahead even if the recent past has been a little unusual. I am not sure that this is the sort of event you should be stress-testing a policy intervention with. This is about fixing a structural inefficiency and deficiency.
“The short-term implications should not change the overall policy intent. Generally speaking people will be better off with pathways.”
When asked whether recent market events should be factored in, he adds: “I don’t think it would do any harm. The more research you do with decision-making the better. But you need to be careful. Pathways are not about engaged retirees. This is about people who don’t get advice and don’t get pointed in the right direction.”
He also says the pathways initiative is already impacting thinking in the trust-based part of the market.
He says: “It is already influencing trustees. A large chunk of the master trusts are constituted as FCA-regulated insurance companies and will need pathways. “Small trustees of single employer schemes in theory should be thinking about this, but in reality they don’t have the resources, but the big sophisticated schemes will be looking at the patterns of behaviour of their members and trying to come up with default strategies that are more appropriate for them.”
Some suggest that if anything, it is a shame that the initiative cannot be brought forward.
Financial Inclusion Centre and former FCA board member Mick McAteer says: “I don’t think the coronavirus changes or alters the case for investment pathways. The current pause is understandable, but you could argue that more and more people are going to be vulnerable to being flogged Covid recovery schemes for their pensions, so we might need pathways more than ever.
“In an ideal world, you would be bringing this forward and speeding it up. I don’t see the need to kick the tyres anymore. There is nothing to suggest that Covid changes overall the risk and reward trade-offs and the considerations for long term saving. I don’t see why the overall framework needs to change.”
It is also worth remembering the FCA regards the pathways as a radical change of direction for regulation, involving more explicit interventions.
Both the FCA chairman Charles Randell and Chris Woolard, briefly the acting chief executive, suggested as much in speeches towards the end of last year.
Woolard was arguably most explicit. He said: “The demand from the public is clear – they don’t care if a set of rules has been followed, they care about the outcome they receive.”
He also talked of “building interventions around real consumer behaviour”. For those who want to change the pathways, they will need to convince the FCA to look at consumer behaviour since March and make a call.