The Financial Conduct Authority (FCA) has called on pensions policy to be simplified for consumers due to the overly complex nature of defined contribution schemes.

Speaking at the Cicero event on the future of regulation, FCA executive director of strategy and competition, Christopher Woolard, said that choices that members may not understand can make a “huge difference” to their retirement outcomes.

He outlined the importance of advice for consumers in making these decisions and helping them understand the complex tax policies on top of their freedom and choice decisions.

“For many, saving for a pension used to simply mean joining a reputable employer and sitting back 40 years in a defined benefit scheme,” stated Woolard. “Today, though, most people rely on defined contribution schemes.

“These pose questions about scheme strategy, fees and charges, defaults and lifestyling. All of which can make a huge difference to the final outcome a pensioner receives.”

He added that pension freedoms has caused the popularity of annuities to drop, one of the simpler ways to receive an income in retirement.

“Consumers are faced with a further array of choices – whether to take tax-free cash, have a drawdown plan, take the cash in full, or in part. To retire early or keep working and stay invested,” he continued. “And these decisions are overlaid with a series of complex tax policies.

“In this context, advice and guidance become extremely important. But delivering this means reconciling a complex array of positions.”

Although most consumers need advice to deal with the fast-changing world of pensions, Woolard expressed concerns at their ability to afford the necessary guidance.

He explained that most advisers tell the FCA that they are not interested in handling smaller pots and most firms don’t want the liability from advice if they get it wrong, while the regulators don’t want criminals into the guidance space or let firms give advice “by the back door”.

“We end up in a stand-off where no one is happy,” he noted.

Woolard concluded: “The truth is that the fundamental way in which the bulk of the population interacts with financial services is changing.

“As consumers take more responsibility for their financial lives, their demands on the financial sector – and the bodies that regulate it – change. Orthodoxies must change in response.

“In particular, I’d argue we need to think about simplification for consumers, not adding layers of rules or advice in some kind of cat and mouse game.

“While some of these issues are not new, the way they are now coming together is. And it’s time to think about what future we want to forge for ourselves.”

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