Providers urged to speed up pension investment strategy reviews

Fewer people are now purchasing annuities on retirement, after changes to the law in 2015 made it easier for pension savers to access their money more flexibly. However, so-called 'lifestyle' investment strategies used in many older pension products remain geared towards annuity purchase, reducing the saver's exposure to the stock market in the run-up to retirement.

The Financial Conduct Authority (FCA) has been reviewing providers' lifestyle investment strategies and the way in which they communicate with their customers since the reforms came into force. In a policy statement, published last year, it urged firms to review the appropriateness of these strategies and to remind customers of what the investments made on their behalf meant for their retirement options.

Publishing some broad findings from that review, the FCA said that most firms had taken the necessary action in respect of new business, and contracts entered into since automatic enrolment began in 2012. However, it was concerned that firms had not yet fully reviewed their older, pre-2012 contracts, including those of customers who were already approaching retirement age.

"We are concerned at the timeliness of these reviews, particularly for customers approaching or having already entered their de-risking phase, and the lack of clear communication to these customers explaining how their lifestyle strategy relates to their retirement options following 2015's pension reforms," it said in a statement.

Firms' plans to review "legacy" contracts entered into in 2001 or earlier were on a "slower track", with reviews typically not planned until later this year and into 2018, the regulator said.

Many firms were considering moving customers with these products to new arrangements, with lifestyle investment strategies not targeting an annuity purchase, preferably by 'deemed consent', the FCA said. Firms had created "new default funds and lifestyle glidepaths" for those customers that had already been migrated to these products, and had communicated with the relevant customers when migration exercises had taken place, it said.

The regulator was also concerned that 'bespoke' lifestyle arrangements set up by advisers, trustees and employers were seen by some of the insurers it reviewed as the responsibility of those third parties. It said that firms should be "proactive" about contacting both the third parties and the savers themselves to ensure that they were reviewing the appropriateness of their chosen investment strategy.

Pensions expert Tom Barton of Pinsent Masons, the law firm behind Out-Law.com, said that insurers had been "working very hard" to develop de-risking models that were suitable for the different options now available to customers at retirement. The problem, he said, was in communicating how these worked to the savers themselves, he said.

"Explaining how lifestyling works, and what the retirement target is, at least equips members to steer things down a different path if they have a particular retirement choice in mind," he said. "However, in reality, it is very difficult to get members to take ownership of these sorts of decisions - leaving insurers in a difficult position."

"The regulatory regime for insurers is very restrictive; much more so than in other forms of pensions where trustees have very wide powers to re-calibrate lifestyling and other aspects of investment from time to time. We really should be looking at removing the regulatory arbitrage between insurance-based schemes and those with trustees who, by comparison, can just get on and do the right thing for their members without worrying unduly about claims, complaints and regulatory intervention," he said.

This would become increasingly important as the retirement product market continued to develop, meaning that "even recently-updated lifestyling strategies may need further work to keep pace with prevailing trends", he said.