Estimated reading time: 6 minutes
The Financial Conduct Authority’s (FCA’s) first Policy Statement of 2019 outlines the changes that pension providers will need to apply to their literature and processes, with the aim of improving consumer engagement with their pension income decisions, as well as making the cost of drawdown products clearer and product comparisons easier.
The FCA launched its “Retirement Outcomes Review” (ROR) in June 2016, in order to assess how the retirement income marketplace was evolving, following the introduction of the ‘pension freedoms’ in April 2015.
Their Final Report of June 2018 followed an Interim Report released a year earlier and was accompanied by a weighty Consultation Paper that we responded to and wrote about at the time.
The stated purpose of the Consultation Paper was to “. . . set out changes to protect consumers from poor outcomes, improve consumer engagement with retirement income decisions and promote competition (between providers).”
In January this year, their response to this consultation appeared in the shape of two separate documents, namely a Policy Statement - and another Consultation Paper! We discuss the latter document in a separate blog , whereas this blog focuses on the contents of the Policy Statement, which is the FCA’s way of saying to providers “this is what you’ve got to do and this is when you’ve got to do it by.”
The first area of change focuses on the information that a consumer receives from their provider before accessing their pension fund (commonly known as “wake-up packs”) and the changes to them take effect from 1 November 2019.
Currently, wake-up packs are provided four to six months before a consumer’s intended retirement date, although the volume and complexity of information included within them typically generates a “I’ll put that over there to read later” response from the recipient, meaning that – in reality - it is likely never to be read.
The changes increase the frequency and decrease the size of wake-up packs, starting with the issuing of a one-page summary about the pension policy within two months after the consumer’s 50th birthday, (when they become eligible to arrange an appointment with Pension Wise), and thereafter at five yearly intervals, until the consumer has fully accessed their pension fund. Additional information is included at age 55 and beyond.
Although more triggers and easier-to-understand material should improve engagement in pension income options, providers issuing more wake-up packs could provoke an implicit message in the consumer’s mind along the lines of “why haven’t you taken your pension yet?” This could thereby exacerbate the problem of individuals accessing their pension funds too early.
It could also lead to more consumers inadvertently triggering the ‘money purchase annual allowance’, which would then limit their ability to contribute later, when they may need to top-up their pensions.
In addition to the one-page summary (sometimes referred to as a ‘Pensions Passport’) the FCA want providers to include “appropriate retirement risk warnings” within the wake-up packs; for example, warning how pension income is initially taxed on an ‘emergency code’ basis.
"The FCA states that providers must identify the main risk factors relevant to their clients and prepare appropriate warnings for each risk factor"
Although laudable, the FCA prescribe that these warnings should fit onto a single side of A4 paper. Knowing how many risk warnings we have developed in connection with the pension freedoms, will we have to include a jeweller’s eyepiece in every pack, to enable them to be read?
The FCA states that providers must identify the main risk factors relevant to their clients and prepare appropriate warnings for each risk factor. There is a perfect opportunity here for the FCA to furnish providers with a set of generic risk warnings, which would save considerable time and money, and promote consistency and good practice. Sadly, all that we receive from them is an instruction that, “our rules do not prevent [the] industry developing a template”.
The second area of change focuses on making the cost of drawdown products clearer and product comparisons easier for consumers to undertake and comes into force on 6 April 2020.
The means of achieving these objectives is two-fold. Firstly, this is to be done by amending the ‘Key Features Illustration’ (KFI) that a consumer receives when first going into drawdown via a new product, or taking an income from their pension for the first time. Secondly, it involves changing the ongoing information that providers supply to their clients, usually in the form of an ‘annual benefits statement’ (ABS).
A KFI can be a lengthy document, crammed full of figures and pension terminology, which also typically ends up on the “I’ll read that later” pile. Akin to the changes to wake-up packs, the FCA are proposing that the front page becomes a summary of key information contained within the KFI; for example, how much tax-free cash is being taken, the amount remaining for drawdown investment, and the projected value of the consumer’s pension fund in five and ten years following the initial date of withdrawal.
Unlike the retirement risk warnings, however, the FCA have actually included two examples of the KFI one-page summary within its Policy Statement, which will greatly aid its development and rollout by providers.
In order to make the cost of drawdown products clearer, the one-page summary must also include a “first year charge figure” in pounds and pence, as opposed to a percentage figure.
Comparing one provider’s drawdown costs with their competitors is currently very difficult, as each provider has their own range of fees and charges, with some expressing them in percentage terms, rather than in pounds and pence. Aggregating the first year’s drawdown costs into a monetary figure and having this displayed prominently on the front page of the KFI, should make it easier for a consumer to compare drawdown costs between providers before deciding who to go into drawdown with.
To complement this, the new Money and Pensions Service (MAPS) also plans to launch a ‘drawdown comparator tool’ at some future point, to act as another reference source.
Finally, in terms of the ongoing information that providers must supply to their clients, the FCA want to see this expanded to include those who have only taken tax-free cash from their pension and no income.
Currently, only those clients who have actually drawn an income are supplied with information to help them review their decision on making income withdrawals, as well as how to get advice.
"Increasing competition and product evolution within the decumulation marketplace is an oft-repeated FCA objective that runs through their ROR reports"
As well as broadening the range of clients, the requirement to give information about advice will be replaced with the need for providers to invite their clients to review their pension product and investment choices and to consider the option of taking regulated advice, or seeking guidance.
By requiring the additional information and enabling more effective and informed ‘shopping around’, the FCA aims to increase competition between providers, concluding, “. . . with increased competition for consumers, there would be an incentive for firms to improve their product offerings.”
Increasing competition and product evolution within the decumulation marketplace is an oft-repeated FCA objective that runs through their ROR reports. Whether the prescribed changes for providers to adopt over the next few months precipitates that desired objective remains to be seen.
George Osborne’s ‘pension freedoms’ caught most by surprise and the FCA has been forced to play ‘catch-up’ since their introduction four years ago. Having identified the potential for harmful outcomes – particularly for those going into drawdown on a non-advised basis – the FCA is now finding its voice and pension providers have no option but to listen, and then take action.