After months of consultation and Covid-19 related delays, the regulator’s ‘investment pathways’ requirements finally went live on 1 February 2021.
The new rules arose from the Financial Conduct Authority’s Retirement Outcomes Review, and aim to improve consumer outcomes under the pension freedoms.
Where customers decide to access pension benefits without taking advice, providers must now ask those customers how they intend to use their funds over the next few years, and offer an investment solution based on the responses.
The process is designed to simplify the process of choosing and managing investments, and to help counteract the high number of unadvised clients who currently inadvertently end up leaving drawdown funds sitting in cash after accessing their tax free cash.
It’s fair to say the initial proposals were met with a degree of scepticism.
There were concerns that the proposals were intended for all pension providers, and largely ignored the fact that the issues looking to be addressed were not prevalent in all areas of the market.
For example, the problem of savers ending up in cash occurred much more often where the individuals had been saving into a pension with default investments, and moved to a different product to access benefits without realising that the new pension did not offer defaults.
The problem was much less prevalent in slef-invested personal pensions (SIPP), where many of those entering drawdown were already customers, and had chosen the product specifically because they wanted to actively manage their investments.
There were also concerns that the investment pathways process risked creating more disengagement among unadvised clients, as it downplayed the importance and complexity of the decisions being made. This echoes a similar concern raised about auto-enrolment: will consumers assume that the minimum contribution levels will provide adequate retirement savings, and therefore believe they don’t need to think about saving more?
Here, the argument was that unadvised customers may assume that there’s nothing more to managing drawdown risks than answering a single, simple question when they first access their benefits.
Some of these concerns were addressed, to some degree, in the final rules. There is an easement for providers with relatively low numbers of unadvised clients entering drawdown each year, which will apply to many ‘traditional’ SIPP providers. There are also requirements to prompt customers to reconsider their chosen investment solution if their circumstances or requirements change.
Of course, it’s far too early to tell whether or not the investment pathways process will be a success. Normally, we have to wait quite a while for any research or reports to start filtering through about how rule changes like this are being used or received by consumers.
However, in this case, you may have noticed that investment pathways made headlines again only a few weeks after launch. Early research has shown significant variation in the pathways solutions that are being offered to consumers.
It’s probably no surprise that one of the variations is cost – setting aside well-worn discussions about value for money and related considerations, there will always be cost variations among even the most comparable of products.
Perhaps more concerning, however, were the reports of the markedly different investment solutions being offered to consumers who gave the same answer to the question about how they plan to use their funds.
On its own I don’t think this could be taken as an indicator that some providers are doing something objectively wrong. However, I do think it could be a symptom of trying to reduce a vastly complex area to a single question and a handful of solutions.
If default solutions are the equivalent of a medium-sized T-shirt, as I recall one commentator describing them, then these early reports show that providers are coming up with very different measurements.
As I say, I don’t necessarily think this means that some are getting it right and others are getting it wrong; but for consumers, it seems they land back at square one in terms of trying to find the best solution to meet their needs.
Another early criticism of the pathways is that the comparator tool from the Money and Pensions Service (MaPS) is not nearly as helpful as it needs to be, and won’t do much to help consumers understand and compare the products and solutions available. Again, this is probably a good indicator that we’re trying to represent very complex products and choices in overly simplified terms.
We still need to wait for more detailed reports about how consumers are using the pathways process, and how it is being received, before we can draw too many conclusions about its success. However, the concerns raised by these very early reports are difficult to ignore.
Jessica List is pension technical manager at Curtis Banks