FCA confirms protections for non-advised drawdown customers

The new requirements are intended to benefit drawdown customers who struggle to make investment decisions, but who do not take financial advice. They are included in the FCA's final set of new rules and guidance (39-page / 1MB PDF) stemming from its 'Retirement Outcomes Review' of the private pensions market following the loosening of restrictions around drawing down pension savings in 2015.

The FCA has also published a separate feedback statement (27-page / 1.5MB PDF) setting out its proposed remedies to improve competition between providers of private pensions and boost consumer protection. They include more transparency around consumer-borne costs and charges and measures to improve governance, similar to those already applicable to workplace pensions. The FCA is consulting on its proposed remedies until 8 October 2019.

Pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law, said that the publication "represents a significant step for the £470 billion non-workplace pensions market".

"The findings of the FCA's feedback very much resemble the findings of the OFT's market study into workplace pensions back in 2013," he said. "Despite the fact that these products are generally sold on an advised basis, there are still concerns about consumer engagement, complexity of charges, low levels of switching and weak price competition. Non-workplace pension providers now face a familiar set of remedies, already embedded in workplace pensions."

Robert Eriksson, also of Pinsent Masons, said: "The FCA's consultation on its proposed remedies could be an opportunity for providers to engage with the FCA as regards how efficient and appropriate the various remedies would be, before it issues a consultation paper on simplification and disclosure remedies early next year, as which time papers will also be issued on IGC [independent governance committee] effectiveness and the proposed value for money framework for pensions, to be developed with The Pensions Regulator."

Private, or 'non-workplace', pensions collectively account for around £470bn worth of assets under administration, or more than double the amount invested in contract-based defined contribution workplace pension schemes, which are similarly regulated by the FCA. These products include individual personal pensions (IPPs), stakeholder personal pensions (SHPs), self-invested personal pensions (SIPPs), free-standing additional voluntary contributions (AVCs), s32 'buyouts' of workplace pensions and retirement annuities.

The FCA's review of the market found that a lack of consumer engagement, combined with what it described as "complex and confusing" products and charges which make comparison difficult, mean there is little incentive for providers to compete on price. Among the measures that the FCA has proposed to address this are greater transparency and standardisation on costs and charges, introducing investment pathways and potentially extending the value for money and IGC requirements that already apply to workplace pensions to these products once it has concluded a review of their effectiveness in early 2020.

For non-advised drawdown more generally, the FCA will require firms to offer four ready-made investment pathways, each based on a different set of objectives. The pathways should be based on the customer having no plans to touch the money in the next five years; a plan to purchase an annuity in the next five years; a plan to take a long-term income from the money in the next five years; and a plan to withdraw the money entirely.

Providers with fewer than 500 non-advised customers will not have to offer the pathways to their customers directly, but will instead be able to refer them to another provider or to the drawdown comparator tool offered by the Money and Pensions Advice Service. Customers will also be required to make an active decision before investing solely or mainly in cash; while providers will also be required to send annual information on all costs and charges paid over the previous year to customers who have begun drawing down their pension.

Pensions expert Tom Barton said that although the pathways "take a fairly short-term view", they would "at least help to steer people away from just parking their money in cash after transfer or taking their tax-free cash".

"With the 'freedom and choice' reforms comes a fair amount of risk for individuals," he said. "Annuities are pretty straightforward because along with your capital, you hand investment risk to the provider – but the new world of drawdown is different."

"Non-advised drawdown customers will now get risk warnings and costs and charge disclosure.  This should help, but not everyone will be able to use this sort of thing to any meaningful effect. The next step should include facilitating more helpful forms of 'help' – advice or guidance – and a wider range of 'set and forget' default options," he said.