The Financial Conduct Authority has warned that it will start looking at value for money as part of its supervision of firms offering investment pathways.
In a post-implementation review of investment pathways published yesterday (July 11), the City regulator said although it has no plans to introduce a charge cap, it has identified value as a “key risk” for consumers accessing their pensions.
“We are broadly comfortable with charges in investment pathways but there are instances of firms charging above 0.75 per cent,” the regulator said.
The FCA said stakeholders generally view investment pathways as a “positive intervention”, particularly in preventing poor outcomes.
“The decisions required at the point of accessing pension savings are complex and present the potential for consumer harm…pathways act as a foundation for further support, addressing a specific harm,” the FCA said.
The regulator acknowledged that there is more to do to support consumer decision-making.
Investment pathways were implemented in February 2021 after the FCA became concerned that many consumers could lose out on retirement income through poor decisions.
The government’s 2015 pension freedoms gave consumers more flexibility in how and when they can access their pension savings but also added another layer of considerations when it came to selecting pension investments.
The regulator wanted to ensure that anyone with a pension drawdown account has access to simple, good-value investments that broadly match their retirement income goals.
These include plans to set up an annuity, to start taking money as a long-term income, to take out all their money or to take out none.
The regulator’s aim is to ensure people think about their retirement journey in advance and ensure they can access an investment solution which is aligned to the way their pension pot will be used during retirement.
Data from the Association of British Insurers showed that pathway take-up was 50 per cent in the first quarter of this year, which the FCA said was “positive evidence” given the low levels of consumer engagement identified and the short time since implementation.
However, it added that publicly available data (such as industry research and public reporting) showed that take-up varies “significantly” across providers.
“This could be for several reasons, including the specific markets served by different providers, how firms communicate investment pathways, and whether firms require consumers to use investment pathways,” it said.
Options available
Customers who enter drawdown or transfer to a drawdown account will initially be given the three options:
- choosing investment pathways
- choosing their own investments
- sticking with the investments they already have
If they choose the investment pathway route, pension companies will be required to offer customers four investment pathway options. These will not be tailored based on their personal circumstances, but rather designed around four very broad retirement income objectives:
- I have no plans to touch my money in the next five years
- I plan to use my money to set up a guaranteed income (annuity) within the next five years
- I plan to start taking my money as a long-term income within the next five years
- I plan to take out all my money within the next five years
Pension companies will then offer investors a single investment solution depending on which pathway they have chosen (based on the assumption that limiting choice will lead to maximum engagement).
sally.hickey@ft.com
