FCA confirms introduction of drawdown investment pathways

Investment pathways for drawdown products are set to be introduced, the Financial Conduct Authority has confirmed.

Publishing its final policy statement for the Retirement Outcomes Review, today, 30 July, the FCA said the introduction of the pathways is a “significant intervention” that will help consumers who enter drawdown to make investment decisions that meet their needs in retirement.

It hopes that by introducing the pathways, the overarching harm identified in its joint pensions strategy with The Pensions Regulator, will be addressed – that people don’t have adequate income, or the income they expected in retirement.

As part of the proposals, drawdown providers must give consumers entering a drawdown product that haven’t been advised, four options for how they might want to use their drawdown pot.

“Small providers can rely on an easement so that, while they have to present the investment pathways, they do not have to offer investment solutions - the ‘pathway solutions’ - themselves. While our current rules do not prevent drawdown providers from offering investment pathways, our research suggests that few do so. So, our proposals will change the options available to most non-advised consumers entering drawdown,” the FCA stated.

Furthermore, drawdown providers will have to ensure that non-advised consumers entering drawdown invest wholly or predominantly in cash only if they have taken an active decision to do so. They must also give warnings to those consumers who do decide to invest in cash, as well as those already in cash when the rules and guidance come into force.

Pension providers must also give consumers in decumulation annual information on the costs and charges they have paid on their pension pot, expressed as a single pounds and pence figure. This includes both advised and non-advised consumers who are either in drawdown or who have withdrawn at least one uncrystallised fund pension lump sum (UFPLS) payment.

The pathways have been largely welcomed by those in the industry, Smart Pension director of policy and comms Darren Philp, said it is a “timely and important step”. Zurich’s head of retail platform strategy, Alistair Wilson, noted that shining a light on the true cost of drawdown will encourage people to shop around and make the most of their pots in retirement.

Quilter head of retirement policy Jon Greer, said: “The logic behind pathways is hard to argue with. They encourage people into an investment that is created broadly designed around them and with their needs in mind. However, we cannot ignore the risks that go along with it and must not forget that for many advice will continue to be key as it will ensure an investment plan that is specifically tailored around them.

“A central issue with pathways is that it may become the path of least resistance and people go for a default instead of engaging. The regulator needs to carefully observe consumer behavior and we need to ensure we quash any public misconception that it doesn’t require the customer’s ongoing input.”

The final policy statement was published alongside a consultation on banning contingent charging, and a discussion paper on effective competition in non-workplace pensions.
The FCA found that many consumers are not engaged in pension decisions or aware of charges they are paying. Products and charges are often too complicated to compare – leading to a lack of price competition.

The FCA has outlined a package of potential measures to protect consumers – these could include requiring providers to offer one or more investment solutions, reducing charge complexity and increasing transparency, so that consumers better understand the impact of charges on their savings.

The FCA is seeking feedback and is keen to explore any alternatives to its ideas with interested parties. The FCA will then consult on new rules for non-workplace pension schemes in early 2020.

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