Posted: 11th August 2016

Pensions and retirement income is clearly still a priority area for the FCA given their continuing focus on the quality of advice and outcomes for consumers.

On Thursday 14 July, the FCA published an update on work around pensions and retirement income, which announced two other publications in the retirement income space. These are:

These publications are closely linked, and so warrant inspection in tandem in order to understand how the FCA is operating in this complex area of retail financial planning.


In March 2015, the FCA conducted their Retirement Incomes Market Study (RIMS) and found a number of issues relating to consumer decision-making following the introduction of the new pension reforms. In particular, they identified consumers’ tendency to purchase from their existing provider as an important barrier to competition. This has two principal effects:

  • Incumbent providers are put under less pressure to offer competitive rates to their existing customers
  • Challenger firms find it more difficult to attract the critical mass of business they need to compete

To tackle this issue, the FCA proposed the creation of an ‘annuity comparator’ to help improve competition. This would provide targeted information just before the point of purchase to help consumers who have decided to purchase an annuity understand the benefits of shopping around. A summary of the FCA’s thinking and research into this is shown later in this communication.

So with this, and the introduction of new options available under pension freedoms, the FCA were concerned that;

“Increased flexibility, product complexity and opaque charges could make it harder for consumers to compare products and shop around, weakening competitive pressure on firms.” 

Indeed, the FCA expects firms looking to meet mass market consumer demands to “ensure that they develop appropriate distribution and guidance arrangements.”

The ROR also arises from the findings of the RIMS. This review is intended to explore how firms and consumers have responded to pension freedoms, and to establish whether issues identified in the previous market study have become more or less acute over time. So, having looked at retirement incomes, the regulator is now going to review retirement outcomes.

Key points from ROR

ROR will primarily look into the effect that pension freedoms have had on competition, which, in turn, impacts on customer outcomes. ROR forms part of a wider package of FCA activities in the pension freedoms space.

The ROR Terms of Reference sets out the following key areas of focus:

Shopping around and switching

The FCA is aware of difficulties in shopping around for annuities. RIMS identified that consumers had problems in getting a good deal when shopping around for an annuity.

The regulator wants to understand;

To what extent consumers can compare and choose between the larger range of products/options now available to them under pension freedoms
The extent to which consumers can easily compare products, shop around or switch providers where they are not receiving what they want, and make good, informed, decisions

Non-advised consumer journeys

Products are more complex and consumers are often accessing these without advice. The FCA wants to understand the consumer journeys, how engaged consumers are in this complex area, and whether so-called ‘choice architecture’ in non-advised sales leads consumers towards certain products, choices and decisions.

Business models and barriers to entry

The FCA will explore the business models and products that are emerging and their impact on competition in this market. They will look at how business models might impact on consumer engagement and switching.  From a competition perspective, they are interested in whether there are barriers to challenger firms seeking to enter the market.

They will also look at international parallels from markets where reforms have taken place.

Impact of regulation on retirement outcomes

The FCA will also look to see if regulation is, or has been, overly burdensome and may constitute disproportionate barriers to entry or prevent useful product innovation.

The scope of ROR will encompass:

  • Competition in the decumulation phase of pension provision, although areas of the accumulation phase may also need to be considered, given the overlap between the two
  • Annuities, income drawdown, hybrid products and the options available to make full or partial withdrawals of cash from pension savings. A range of related products may need to be considered as relevant wider context
  • The geographic scope of ROR will be UK, but will take into account any relevant initiatives and changes that will influence the market at UK and EU levels

Access to financial advice is not within the scope of ROR, as this is already a key area of focus for the FCA in the coming business year, following the conclusion of the Financial Advice Markets Review (FAMR) in March 2016.

Regulatory next steps in relation to ror

The regulator will be seeking responses from the industry and other interested parties by 31st August 2016. The FCA will consider the responses they receive and continue to engage with stakeholders as the review progresses. They will also host roundtables and bilateral meetings as appropriate.

The target date for concluding the ROR and publishing the final report is in the summer of 2017.

Key points from the annuity comparator research

Broad lessons learned from the research are that people are heavily influenced by comparing themselves with their peers. It was emphasised to specific groups of research participants that most people are disadvantaged by staying with their existing provider, and this had a significant effect on their willingness to consider shopping around.

Conversely, providing too much information can also disengage customers and undermine the effectiveness of other communications. The research evidences two key conclusions for an annuity comparator:

  • It should have a significant impact on shopping around
  • It should be able to provide particular and personalised forms of information about retirement income

The FCA will consult on the rule changes necessary for implementation later this year. They will test ways to improve the wake-up packs by simplifying and clarifying the information they contain; as well as considering this for the reminders that customers are sent.

The Advice Unit within the FCA, which opened on the 1st June 2016 will provide regulatory feedback to firms developing automated models that seek to deliver lower cost advice to consumers.

The FCA’s supervisory monitoring with Pension Wise Designated Guidance Providers is intended to ensure that consumers receive appropriate guidance on their options when they use the service. Providers are supposed to signpost the service to their customers in an appropriate way.

Thoughts for firms

This area of the FCA’s focus is likely to stimulate debate, and activities of particular interest for firms will include:

  • Ensuring effective customer outcomes testing is performed on retirement products, processes and complaints procedures
  • Making sure approaches to vulnerability are comprehensive, documented and publicised within the business (with the required level of staff competency embedded)
  • Assuring themselves that customer communications are compliant, clear and therefore will not contribute to future detriment
  • Retaining documentary evidence of the changes made in this area (and why) in order to articulate decisions and overall approach to the regulator if required

The issues will also implicate financial services firms’ internal culture and the wider public trust in financial services. Firms will, in time, need to assess their performance in relation to the well-publicised advice gap – for example, how they are using simplified advice models and/or non-advised processes to ensure the right products reach the right consumers. This element is likely to develop further as the FCA continues to focus its efforts on advice and pensions.

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