One of the major proposals set out in the recent CP18/17 paper on the Retirement Outcomes Review from the Financial Conduct Authority (FCA) is that drawdown providers should offer customers three distinct ‘investment pathways’ to make their choice of suitable investments easier.
For some reason, this brought Led Zeppelin’s iconic 1971 track ‘Stairway to Heaven’ into my head. Although that may seem like ancient history to the youth of today, it is worth remembering that someone who turns 65 this year was actually 18 when the song first became a hit – so I decided to look up the lyrics:
There’s a lady who’s sure
All that glitters is gold
And she’s buying a stairway to heaven
When she gets there she knows
If the stores are all closed
With a word she can get what she came for
Oh oh oh oh and she’s buying a stairway to heaven …
What has caused the FCA to make these proposals is that, having reached the retirement point and usually taken the entire tax-free cash sum, the future stairway in terms of investment is by no means clear.
According to the regulator’s research, 28% of consumers were not sure where their drawdown monies were invested and a further 34% only had a broad idea of where their money was. Worryingly, one-third of those in drawdown are holding all their pension money in cash deposit form.
These statistics are leading the FCA to propose a ban on providers themselves defaulting drawdown clients into cash-like investments or even allowing clients to default themselves into such funds. This is the first time I recall seeing the FCA state it considers customers could enjoy greater income through investing in a mixed-asset fund than staying in cash – it actually quotes a 37% improvement.
The problem the FCA then has to face is what should the default be? And here the FCA is rightly concluding there is no single ‘stairway to heaven’ – it does all depend on how the customer is planning to spend their pension pot. Consequently, it is proposing non-advised customers should be led through a “structured choice architecture” which invites them to align with one of three core propositions:
* I want my money to provide an income in retirement;
* I want to take all my money out over a short period of time; or
* I want to keep my money invested for a long period of time and may want to dip into it occasionally.
Firms will need to offer a single investment solution in respect of each of these objectives and, further, the FCA considers a single investment proposition that covered all three would be suitable.
It needs to be remembered these proposals are aimed mainly at those customers – the majority, in fact – who are choosing to go into drawdown on a non-advised basis. As such, there are clearly implications for advised clients. Indeed the FCA is asking a total of 33 questions just around these specific proposals in its consultation paper. Some of the questions that arise include:
* How a wider range of investment choices be offered without making the “architecture” too complicated?
* What to do with customers who still make no active choice?
* What do SIPP providers do as they generally do not provide their own direct investment solutions?
One of the other aspects is the FCA recognises the investment pathways being offered – it very much dislikes calling them ‘default’ funds – will not be optimal for all investors. Indeed most advisers would seek to base their own recommendation on a customer’s attitude to rsk whereas the FCA is specifically saying the investment pathways should be a single solution for each of the three pathways.
Perhaps this is because it is obvious most customers, when left to themselves, are overly cautious in terms of their long-term investment choices. Too many opt for the ‘safety of cash’ without realising £10,000 left in the building society will only buy £7,800 worth of goods in 10 years time. This brings me back to ‘Stairway to Heaven’, which further states:
There’s a sign on the wall
But she wants to be sure
‘Cause you know sometimes words have two meanings
These words seem apt in two ways – first, although much has been made of the need for ‘signposting’, the attempts so far are not really working as the regulator would wish. Furthermore, the final line looks particularly apposite to the discussions leading to the dividing line between ‘guidance’ and ‘advice’.
The public has no clue as to the fine difference between those two terms as they are understood by the industry. This leads one to question whether the investment pathways being proposed can in reality be considered to be guidance … or are they really advice? To further quote the song:
It really makes me wonder …
Nigel Chambers is managing director and co-founder of CTC Software