Late last month the Financial Conduct Authority (FCA) began the most comprehensive reappraisal of the retirement market since the new Pension Freedoms were introduced in 2015, launching a consultation following the publication of its Retirement Outcomes Review.
It is seeking feedback on a broad package of measures proposed to safeguard consumers’ pension pots, enhance consumer engagement and increase competition in the retirement income market.
For example, suggested changes to ‘wake-up packs’ provided to consumers would see the inclusion of a clearly and accessibly written one-page headline document or pensions passport together with specific retirement risk warnings.
Feedback is also being asked about proposals that providers should offer standardised drawdown investment solutions at the point of people entering drawdown or purchasing an annuity and about the suggestion that consumers new to drawdown should make an active choice to be in cash.
In particular, the FCA highlights how some drawdown customers stand to receive an estimated 37% higher annual retirement income by investing in a mixture of assets as opposed to simply being in cash. It is therefore asking pension providers to steer investors towards a selection of investment strategies which would help them avoid such an underperformance risk.
Although Chase de Vere welcomes the proposals – and the simplification to documentation in particular, we feel that they are really just tinkering around the edges with tweaks to a current system that isn’t actually working.
The main issue to be faced by employers is that, whatever the government does and doesn’t do via regulation, there will never be a one-size-fits-all solution to retirement planning.
Employees need to be encouraged to think individually and to make the right choices at retirement to suit their own particular circumstances, reflecting factors such as their state of health, family commitments, expected outgoings and existing savings levels.
Employers can certainly help by ensuring they put in the necessary work on governance, particularly with regard to their default funds, but even this can only achieve so much.
At the moment most default funds target those who are intending to use drawdown rather than purchase an annuity. Obviously, this approach will not be suitable for everyone and, for this reason, we actually believe it doesn’t matter that much whether a default fund targets annuities, drawdown or cash.
Additionally, even if an employee intending to use drawdown is in the right default fund, that fund will only target drawdown up until their intended retirement age.
We feel that there could be a place for a default fund that takes employees past retirement age but the government has blocked this on the grounds that the Pension Freedoms are about enabling choice – and that having a default takes away this choice.
For these and other reasons we firmly believe that all employees are likely to be best served by taking individual one-to-one face-to-face regulated financial advice to ensure that they make the investment choices most appropriate to them.
The simple fact is that a lot of people just don’t understand investment and need professional help. If employers fail to offer them this then they risk all the good work they have done in the accumulation phase being thrown away by employees making the wrong choices.
Chase de Vere, which is unusual for an employee benefit consultancy in also having an Independent Financial Adviser (IFA) arm, can provide employees with suitable personalised advice in this area.
Obtaining a decent level of advice for relatively straightforward cases with average-sized pension pots is likely to cost around £1,000. This can include a full fact find, discussions about available options and positive recommendations on what to do.
Employers who don’t feel able to afford such an outlay can always consider splitting the cost with the employees concerned or, at the very least, simply pointing those willing to pay for their own advice in the direction of a suitably vetted adviser like ourselves.