The FCA has published its retirement outcomes review interim report. The report forms part of the FCA's assessment of the impact of the pension freedoms on the pension market and consumer behaviour. Although the focus of the report is non-advised sales it provides a useful insight for all those involved in the pensions market in relation to (1) customer behaviour post the introduction of the pension freedoms and (2) how the pension market is responding to those reforms. The report also puts forward some proposed "remedies" in relation to areas where the FCA considers behaviour may be detrimentally impacting customers. The remedies include permitting customers to access part of their pension at an earlier date in what appears to be an attempt by the FCA to steer customers away from drawdown products.
Facts and figures and emerging issues
The report sets out a considerable amount of facts and figures on consumer behaviour post the pension freedoms and uses those statistics to inform its views on what it considers to be the five key emerging issues:
The report notes five emerging issues from the data available:
- Over 52% of fully withdrawn pots were not spent but were transferred into other savings or investments. It is said that some of this is due to mistrust of pensions.
Around £10.8 billion has been withdrawn post pension freedoms with over half (53%) fully withdrawn. The data indicates that those who fully withdrew their pension ended up in 14% of cases paying off debts, 32% put money into an ISA, savings or current account, 20% invested in other assets including property and 25% spent their pot.
The report also looked at the reasons for consumers withdrawing their entire DC pot with the main reason being that a separate DB pension was their most significant source of income in retirement (accounting for 24% of cases). However, perhaps of more concern is that for 41% of consumers the withdrawn pot was their only private pension arrangement.
- Most consumers chose the "path of least resistance".
The data indicates that a low level of consumers "shop around" for their retirement products with 94% of non-advised drawdown sales made to existing customers of pension providers and 70% of non-advised annuity sales.
By comparison consumers who obtained advice were much more likely to move to a new provider, with 65% of advised sales to new customers. The report notes that based on its findings the reasons for consumers not shopping around were (1) mistrust of pensions and (2) consumers following the "path of least resistance", giving rise to a concern that consumers are withdrawing their money without having a genuine need for cash and so may have paid more tax than necessary (for example by transferring their pension to an ISA rather than keeping the pension pot).
- Many consumers buy drawdown products without advice but may need further protection to manage their drawdown effectively. The proportion of drawdown products bought without advice has risen from 5% to 30%.
The report notes the complexity of drawdown products where funds should stay invested to meet pensioner needs in the decumulation stage. Notably it is said that some large insurers have restricted the sale of drawdown products to advised cases. The report also notes the FCA's concern that a lack of shopping around for non-advised drawdown products is likely to lead to low competitive pressure on existing providers to provide good deals and with that the potential for higher charges or products of lower quality.
The report also contains a section dealing specifically with the complexity of drawdown products and the difficulty in comparing products.
- Less choice for those seeking an annuity with the contraction of the annuity market to now only 7 providers.
- Product innovation to combine flexibility with an element of guaranteed income is said to have been limited to date.
Given the emerging issues extrapolated from the FCA's interim findings, the FCA proposes a number of "potential remedies":
- Additional protections for consumers who buy drawdown without advice.
More consumers reaching retirement will be deciding what to do with their DC pension pot generated as a result of automatic enrolment and default investment options. One reason for this proposal, therefore, is that there is an increasing risk that there will be consumers entering drawdown with no historic experience of making their own investment choices. The FCA is to gather further evidence in this area before deciding on whether or not intervention is required. However, potential remedies the FCA is considering include (1) default investment pathways for consumers who do not or cannot engage with investment decisions, (2) a charge cap and (3) extending the role of Independent Governance Committees.
The FCA also considered introducing an appropriateness test for consumers moving into drawdown without taking advice based on skills and experience of the consumer. The FCA has decided not to pursue this option at this stage but may do so in the future.
When it comes to withdrawal strategies from drawdown products, the FCA has not made any proposals as it is "too early to assess whether consumers are making poor choices".
- Remedies to enable consumers to access their savings early without having to move into a new drawdown product.
The FCA's finding that consumers move to drawdown to access their tax free cash before retirement and then have not in 60% - 80% of cases withdrawn further funds, raises concerns for the FCA, particularly given the fact that consumers are largely failing to shop around for their drawdown product. The FCA wants to "decouple" the decision to access tax free cash from the decision as to what to do with the remainder of a pot and invites comment on this proposal.
- Making it easier to compare and shop around for drawdown products
The FCA proposes two options here (1) facilitating the introduction of drawdown comparison tools and (2) promoting the use of summary cost metrics. The FCA is inviting views on whether a comparator tool should be market led or led by the new Single Financial Advice Body and what information the tool should provide.
- Helping consumers to understand their options after pension freedoms
The FCA proposes to (1) review communications sent to consumers before and when they access their pension pots, potential measures include (a) short wake up packs and changing when/how they are sent to consumers, (b) moving the onus to provide a wake up pack from providers to Pension Wise or another body and (c) using the Pension Dashboard initiative so that wake up information is available through the dashboard, (2) develop further comparison tools and (3) increase consumer awareness of enhanced annuities, including imposing an obligation on providers to inform consumers of their eligibility for an enhanced annuity earlier in the process and to warn of the implications of not taking this option.
Consumer behaviours to date have not been as infamous as Steve Webb's Lamborghini, but there are concerns around the drawdown market. Much the same as the enhanced annuity review, the FCA appears worried that consumers do not switch between providers and instead keep their drawdown product with their current provider. Also, there is a concern that once a drawdown product has been purchased consumers may be paying high charges or choosing unsuitable investment strategies. This concern is linked with the issue that some consumers are utilising drawdown products for short term cash needs before reaching retirement and so end up in a drawdown product for reasons driven by short term cash concerns rather than longer term provision in retirement.
The report provides an important insight into current consumer behaviour in the advent of the pension freedoms. Perhaps unsurprisingly the product of choice for consumers has been drawdown rather than annuities. However, the overarching point from the report is that broadly consumers are making sensible decisions, even in the absence of advice, when it comes to their retirement product.
It will be interesting to see whether, at the end of the consultation, the government introduces the ability for consumers to access their pension pots on a limited basis earlier and to allow for effectively staged access to pension pots. This may be an acute need given the increase in the state pension age.
What the report also shows is the FCA's willingness to monitor and intervene in the pensions market if it considers consumers are making decisions which negatively impact on their retirement provision. The report invites responses by 15 September 2017.