The Financial Conduct Authority (FCA) have published the Retirement Outcomes Review: Proposed changes to our rules and guidance today. Are a number of these findings just stating the obvious? James Jones-Tinsley shares his insight.
The pension freedoms have significantly accelerated a massive sea-change that was already happening in UK pensions: the shift from defined benefit schemes to defined contribution. Like defined benefit schemes, defined contribution schemes have their own pros and cons. How these two different types of schemes balance the eternal conundrums of pensions should remind us that this is no simple question and there is no one answer fits all.
The freedoms allow the flexibility to ‘shape’ your retirement and this is a great fit with modern trends. It will, however, take a long time – a cohort’s retirement from start to finish – to truly be able to judge how well people managed and how happy they were with their choices. Will early splurges be balanced with later caution? As yet, we simply do not know. Those questions do, however, hint at one of the big issues to be tackled for the pension freedoms to deliver good outcomes: ongoing engagement, guidance and advice throughout retirement. The framework in place since the freedoms took effect – such as the ‘second line of defence’ – has been focused at the point of retirement, a concept very much stuck in the old world of defined benefits.
A number of their ‘findings’ are simply stating the obvious. For example, consumers wanting to get their hands on their pension fund in the quickest way possible by not shopping around, going into drawdown with their existing provider, with little or no thought on where the remainder of their fund is invested.
In addition, the opaqueness and differences in drawdown charges across providers is readily acknowledged, but the emphasis on stating this in terms of percentages in one place will focus minds. However, providers ‘defaulting’ consumers into cash or cash-like assets came as a bit of a surprise to me, given that drawdown should be a longer-term investment strategy. Whatever happened to the emphasis on ‘Type A and B’ investment returns, and the implications of ‘mortality drag’?
As well as the Report itself, the FCA have also published a Consultation Paper CP18/17 setting out their proposed package of remedies, and it is right that this package focuses on consumers making better choices before accessing their pension savings, at the point of making a decision, and then throughout their retirement.
The process of drawing benefits from a pension fund should not be a ‘once and done’ exercise. The problem is that the ‘pension freedoms’ have made this the norm for many consumers.