Concerns raised over use of 'lifestyling' in FCA proposals

Industry experts have praised the Financial Conduct Authority’s (FCA) intent to help non-advised customers in new proposals, although concerns have been raised over the role of lifestyling and the need for advice and guidance.

The proposals would require firms offering personal pensions to offer a default investment option to help non-workplace pension customers that have not received advice save for retirement, and to warn savers holding high levels of cash of the risk.

Scottish Widows head of pension policy, Pete Glancy, noted that whilst the individual pensions market has traditionally met the needs of wealthier consumers working with financial advisers, it is now more common for those without a professional financial adviser to turn to this market to consolidate pots accumulated through auto-enrolment.

He continued: “The FCA’s proposals to extend the concept of a default fund into non-advised workplace pensions means people can access a well-governed investment option and get good value for money, without the need to make complex investment decisions.

“The proposals will also help prevent people leaving too much of their retirement savings in cash at a time when the current inflation rate will steadily erode the ‘real’ value of those savings.”

Canada Life technical director, Andrew Tully, agreed, stating that helping non-advised customers make good investment decisions, and not simply hold pension funds in cash over the long-term, were “sensible suggestions from the FCA”.

“However it is important these changes have minimal impact on the advised market, where advisers help clients make investment choices appropriate to their individual circumstances,” he clarified.

Echoing this, Hargreaves Lansdown senior pensions and retirement analyst, Helen Morrissey, suggested that whilst the proposals are a “positive with the potential to bring real innovation”, the importance of high-quality guidance should not be disregarded.

“We must not forget the provision of high-quality guidance is also vitally important in empowering people to make more informed investment decisions throughout their retirement planning journey,” she said.

“People’s needs change and with the right education we can ensure they are able to make the appropriate ongoing changes to ensure they reach retirement in the best financial shape possible.”

Adding to this, AJ Bell head of retirement policy, Tom Selby, argued that the whilst the proposals could help improve outcomes, care will be needed to ensure engaged customers who were planning to build a retirement portfolio based on their circumstances "are not encouraged to instead simply go for the ‘easy option’ of investing everything in a single default fund that might be less appropriate".

“The FCA has taken a pragmatic approach to how the default fund should be offered to people, insisting only that it should be ‘prominent’ in communications, and allowed for flexibility in the design of such funds,” he continued.

“This should help ensure the reforms are introduced in a way which can genuinely help savers.”

However, Selby disagreed with the regulator’s assertion that ‘lifestyling’, a concept based around reducing the risk of investments as people approach a selected retirement date, is likely to be appropriate for most people.

He explained: “The majority of savers now choose to enter drawdown and stay invested in retirement, and so reducing risk ahead of this point will make little sense in many cases.

“Indeed, the idea of basing your investments around a set retirement date ignores the fact retirement is flexible for many people, rather than a specific point in time.”

These concerns were shared by Tully, who said that it "seems a little odd" that the FCA has suggested default funds should include lifestyling.

"Many clients will move into drawdown as they start to access their pension, and lifestyling may not be an appropriate choice in those circumstances," he explained.

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