What the FCA did next...
If you were to introduce such a large scale change as the pension freedoms you probably wouldn’t have done it the way that it happened in practice.
From the minute the closely-guarded policy was unwrapped, the reverse engineering stepped up a gear. After the announcement, we then had to find a way to giving help and guidance to people making decisions (Pension Wise was born a few months later); schemes and providers had to change rules (some still haven’t done that); and the final legislation only appeared mere weeks before the ‘go live’ date.
The FCA seems to have been playing catch up all along – for example its retirement risk warnings were launched very close to the 6 April launch date. At the beginning of this month – six months after the pension freedoms began - the FCA issued a consultation paper on what regulation changes needed to be made to help pension freedoms run more smoothly. The paper is 139 pages long – no lazy thumb through – and it tries to cover a lot of areas. For example it tackles the problem of providers and advisers shying away from insistent customers and asks what safe harbours we can put in place. Our view remains that the problem of insistent customers shouldn’t really arise. Any customer insistent on transferring against our advice either has not understood our reasoning, or we haven’t understood their objectives. In either case, we need to sit down and talk.
Another area covered by the paper is how customers can be influenced by providers’ paperwork. So the FCA is banning providers from sending out retirement options application forms. So far, so good. But it also suggests that if a provider sends out an illustration for a particular product then they should also send out illustrations for all their retirement products. The idea is to reduce the paperwork sent to the customer – but I worry it will do the opposite and inundate them with superfluous information instead.
There are two areas, however, in the FCA’s paper I’m pleased to see further discussion on. The first is the importance of lifestyling investment strategies. The FCA highlighted that in the new environment these profiles will need to reflect a greater number of options and, hence, increased uncertainty around when people will retire and how they will access their savings. But it’s so difficult to have one strategy which is supposed to fit several hundred or thousand people’s retirement plans. People need to think about their retirement plans several years out and then decide what investment strategy they need. The retirement strategy for drawdown is not the same as the strategy needed for annuity purchase or the strategy needed for combination plan or UFPLS withdrawals. We need to have the conversation much earlier about what retirement options people want, and therefore what investment strategies to adopt in the final run-up to retirement.
The second area is sustainability. The regulator is consulting on guidance that provides a number of suggestions for ways in which firms can provide information to customers on sustainability of income so consumers have a better idea of how long their funds are likely to last. Providers should consider what sustainability risks their products pose and develop appropriate measures to keep their customers informed, along with what additional information should be supplied to customers at times where “significant market movements” have materially affected funds. Sustainability is certainly a key risk for clients. There is a great danger drawdown clients will run out of funds before death. Tools such as our Retirement Income Forecaster are needed to demonstrate what could happen in practice by choosing a certain rate of income. Anything the industry can do to improve the communication of this message has to be welcome.
There’s a lot to read in the FCA paper. Many of the ideas and proposals are needed if the regulation of pensions freedom is to run smoothly.