The Financial Conduct Authority’s (FCA) proposal to offer non-workplace pension savers, who had not received advice, a single default fund could risk hard-wiring inertia and potentially lead to worse investment returns, AJ Bell has warned.

Responding to the FCA’s consultation ‘Improving outcomes in non-workplace pensions’, which proposed requirements for non-workplace pension providers to offer a default investment option that incorporates ‘lifestyling’, AJ Bell head of retirement policy, Tom Selby, said that single default fund was “not the optimal solution”.

He acknowledged that there was a risk non-advised customers who choose to invest in non-workplace pensions could struggle to make good pension investment choices and a default investment solution could therefore help improve outcomes.

However, Selby stated that a single default fund could disengage savers as they may just opt for the easiest solution, which could leave people “investing in a sub-optimal fund for decades”.

AJ Bell suggested that offering a small range of risk-managed, multi-asset funds could lead to better retirement outcomes for non-advised customers in non-workplace schemes.

Selby continued: “The FCA is proposing that firms should build ‘lifestyling’ into the design of non-workplace default investment solutions.

“The idea of lifestyling was originally based on someone converting their entire pension into an annuity at a set retirement age – usually state pension age.

“However, since 2015 the retirement income market has flipped, with most people entering drawdown and keeping their pot invested.

“The extra flexibility created by the pension freedoms means people access their pension at different points in time and at different rates, meaning there is no clear point in time to de-risk a default towards.

“If someone is de-risked inappropriately – either too early or too late - this will lead to sub optimal retirement outcomes. Both will inevitably happen under the FCA’s plans.

“A small range of risk-managed funds, combined with education and nudges at appropriate ages could help non-advised customers implement their own de-risking strategy to suit their individual circumstances and needs.

“This could have the added benefit of boosting engagement among savers who plan to enter drawdown.”

Also responding to the consultation, The Investing and Saving Alliance head of retirement, Renny Biggins, stated that the organisation fully supported the “fundamental principles” of simplifying the investment decision-making process.

“We do need to be mindful that pension schemes and specific pension products attract different types of consumers,” he continued.

“The typical client profile is therefore likely to vary significantly across all non-workplace schemes. While the concurrent new Consumer Duty proposals cannot be considered a panacea for good consumer outcomes, they should provide the confidence to policymakers to enable complimentary proposals to recognise these profile differences and be less prescriptive in nature.

“We need to build on existing momentum alongside other engagement and support initiatives. The development of an enhanced guidance framework within the regulatory regime, alongside other initiatives, would help to ensure retirees are motivated and aware of their options. This will help make sure they have a sufficient pension pot when they reach retirement.”

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