Can you compare pathway investments?
Despite a common naming convention, pathway investments aren’t the same and aren’t easy to compare.
There have been rumblings of discontent about the asset mix of each pension provider’s pathway investments and the difficulty of making comparisons. Weren’t pathway investments supposed to make things easy?
The Financial Conduct Authority (FCA) identified a number of issues arising from the 2015 pension freedoms. Their 2018 final report sets the scene.
"Deciding how to use pension savings is one of the most important financial decisions people will make. The government’s 2015 pension freedoms provided more flexibility in how and when consumers can access their pension savings. At the same time, the freedoms require consumers to make more complicated choices about their retirement. These include important decisions on how to invest their pensions pots, when to withdraw income (and at what level), and the need to consider longevity risks."
They zoomed in on the “how to invest” bit. Their solution was investment pathways – four options describing how people want to use their pension, with every provider’s investment solution carrying these same names. However, the investments are not prescribed and so they are not the same. It creates the illusion of a commoditised investment solution while being anything but.
Bear with me on a flight of fancy to help picture what’s going on here.
Imagine the Food Standards Agency (FSA) is concerned that people aren’t making the right choices to be hydrated and healthy. Let’s say they decide all retail outlets are to sell a core range of four healthier options, covering different tastes and needs, in addition to any drinks they may already sell.
Let’s say the range is:
- Non-alcoholic beer
On the face of it, it’s a simple decision for the customer. Which drink most closely aligns with how they want to quench their thirst?
But is one juice the same as another? It could comprise all sorts of fruit, on their own or in combination. It could be freshly-squeezed or from concentrate. With bits or smooth. With artificial additives or not. Vitamin-enriched or natural. You get the idea. We could do the same with all the others. Comparing, say, a freshly-squeezed organic mango juice with a carton of long-life prune juice is not, shall we say, comparing apples with apples.
Making the comparison is surely considerably harder when we are talking about investments.
The analogy is contrived and I don’t think any of us really see something like that happening but let’s stick with it a moment longer and imagine why the FSA came up with this fictional solution. When they determined that an unacceptable number of people weren’t hydrating healthily, they hopefully came up with a set of requirements first. I imagine they looked something like this:
- Healthier drinks need to be widely available to buy
- There needs to be enough choice
- We want prompts to encourage people to make healthier choices
- We want people to understand their choices (e.g. labelling sugar content and calories)
In reality, they would have stopped there. There’s room for improvement, but the requirements would be near enough met already.
Let’s turn back to investment pathways and pathway investments.
The rules fall short of mandating the type of ‘juice’ that has to be offered. If the regulator wasn’t happy to specify what goes in the bottle, perhaps they should have stopped at requirements and principles rather than a detailed solution.
Their requirements might have looked something like this:
- Encourage greater use of regulated advice
- Make a range of lower risk investments available
- These investments should be easy to choose from
- They should be designed with customer needs in mind – needs such as withdrawing the fund or buying an annuity within a short period, taking income over a longer period or leaving it all invested
- The options should be prominent in the retirement/transfer journey
- And they should be competitively priced
One requirement that apparently was made was that the investments be comparable – presumably why we had the Money Advice Service comparison tool. But why would you shop around when every provider appears to be offering you the same four options? The only thing you can compare is price, but that doesn’t help you if you need to make a choice between “fresh” and “from concentrate”.
Pathways can’t be comparable unless the framework is hugely more prescriptive than it already is. A move obviously in the wrong direction.
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