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Regulatory update: CP18 / 7 Retirement Outcome Review - Proposed Changes to our Rules and Guidance

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Background:

On the 28th June 2018, the Financial Conduct Authority (FCA) published the retirement outcome review: proposed changes to our rules and guidance. The regulators remedy package aims to address the harms and emerging issues that they have identified in the pensions market. They intend balance the need to protect customers and improve competition in the market, whilst allowing the market to develop and innovate within an evolving regulatory landscape.

The FCA intend to take steps to protect customers and help them make better choices before accessing their pension savings, at the point of decision and throughout their retirement.

Christopher Woolard, Executive Director of Strategy and Competition at the FCA said:

“We know that the choices introduced by the pension freedoms have been popular with many consumers.  However, they’re now required to make more complicated decisions than ever before. Many people need more support when making choices.  The measures we have outlined today will help them think about that earlier, create investment pathways to help them with their choices and make costs and charges easier to understand.

“This is an important market that is still relatively new and is continuing to evolve. This is not the end of the work we are doing, and we will continue to keep the market under review as it develops.”

Key Findings

The headline findings of the report show that pension freedoms were welcomed by consumers, however, some customers were found to be at risk of financial harm. It is this risk that the FCA are seeking to address. The FCA also reported that 60% of consumers who do not take advice about their income drawdown for retirement income were either not sure or only had a broad idea of where their money was invested.

Better communications, support and guidance

The regulator wants to ensure the effectiveness of communications and allow consumers to access the support or guidance they need.

The FCA have proposed changes to ‘wake up packs’ with the intention of getting them to reach consumers at the right time to inform their decision, ultimately becoming more useful to them. The regulator is consulting on proposals to require wake up packs to:

  • Incorporate a one-page ‘headline’ document, in clear and accessible language
  • be sent earlier in the process, from age 50, and every five years thereafter until the pot is accessed
  • include risk warnings, from age 50 onwards

Entering drawdown or buying an annuity

The FCA are seeking feedback on:

  • Providers offering ready-made drawdown investment solutions within a simple choice architecture (‘investment pathways’) which reflect standardised consumer objectives
  • New consumers accessing drawdown will have to make an active choice to be in cash. The FCA also expect firms to have a strategy for dealing with consumers who have already been defaulted into cash, and who are unlikely to be best served by this investment strategy

The regulator is also consulting on the following proposals:

  • Have firms provide a summary showing key information at the front of the Key Features Illustration (KFI) that consumers receive, including a one-year charge figure in pounds and pence which is comparable across KFIs
  • Having firms ensure consumers are aware of their eligibility for an enhanced annuity

The FCA are also working closely with the Money Advice Service (MAS) and the Association of British Insurers (ABI) to develop a drawdown comparator tool.

Once a consumer has entered drawdown

Once a consumer has entered drawdown they still need information and support. The FCA are also seeking feedback from stakeholders on:

  • The proposal that providers should send information to their customers in drawdown annually about whether or not they are currently drawing an income from their pot
  • Whether firms should remind their customers annually of their chosen investment pathway and their ability to switch

Next steps

The FCA are seeking views on their set of proposals for consolation and discussion in this consultation by the dates listed below: 

  • Comments on proposals for discussion (questions 1-33 and 47-49) by 9 August 2018
  • Comments on proposals for consultation (questions 34-46) by 6 September 2018

Consideration for firms:

Firms should be considering the consultation and remedies proposed within this paper. They should be actively looking at where their firm currently sits against the proposals and what changes may need to be implemented.

It is clear to see that value for money plays an integral part within the report, with the FCA’s proposal for firms to include a one-year charge figure, shown in pounds and pence. The price disclosure would be made in the KFI and firms will have to be sure that they offer value for money to their customers and should also ensure they look beyond ‘just price’ when ascertaining value.

The FCA have seen considerable variation in charges between different retirement income plans and also found that comparing plans wasn’t always simple, with some pension providers offering complex and opaque charging structures. Consideration should be paid to where individual firms sit against this finding and ensuring your firms charging structure is fair and simple to ensure consumer understanding and ease of comparison.

Finally, the FCA has made it clear that failing to introduce investment pathways with appropriate charge levels could result in a cap on drawdown charges. It is worth noting at this stage that the regulator is not proposing a charge cap within this consultation, however, firms should be able to demonstrate real action in response to this consultation to prevent against this potential risk crystallising.