FCA Review reveals scale of task to restore confidence in pensions

Claire van Rees, partner at Sackers, comments on the interim findings of the FCA’s Retirement Outcomes Review:

“The FCA’s interim report on its Retirement Outcomes Review makes for worrying reading. One of the few encouraging findings is that people don’t seem to be freeing their pensions savings to buy Lamborghinis.

“However, many people are choosing to move into drawdown to access their tax free cash, without taking advice, without shopping around, and without necessarily giving appropriate consideration to where best to invest the rest of the fund.

“Others with smaller pots are taking out the whole of their fund, often to put much of it into other savings without appreciating the disadvantages of this compared with leaving it in a pensions vehicle. Mistrust in pensions fuelled by the prevalence of negative news stories and concern about frequent changes in pension rules is cited as a key driver for such behaviour. The pace of policy change is also identified as a reason why there hasn’t yet been much innovation in the market for retirement products post-pension freedoms. The Government would be well advised to stop tinkering with pensions taxation, or risk further reducing confidence in pensions.

“It is also concerning that attempts at providing more information to empower consumers to make better decisions do not appear to be very effective. The FCA’s research suggests that the information given by providers has limited impact on decision making, particularly where it aims to encourage consumers to think through the potential implications of withdrawing their pension savings. Pension Wise also seems to have a low take-up rate. People have fixed ideas about what they want to do, based on what they read in the media and hear from friends, family and colleagues, and think providers trying to get them to consider their options more carefully are simply “back covering” or trying to delay them taking their money.

“It is difficult to know how to address these issues effectively. Do you try to put more protections for consumers in place? The FCA has suggested having default investment options for drawdown and extending the charges cap to decumulation. Or do you focus on providing more support to consumers to maximise the chances that they will make the right decisions for themselves? Given the challenges identified in getting people to engage with communications unless they have things explained to them face-to-face, further tick-list disclosure obligations seem unlikely to achieve anything, so other avenues must be explored.

“One thing is clear – policy makers and the pensions industry have a lot of work to do to restore confidence in pensions savings and head off a future crisis as younger generations reliant on DC pension savings reach old age.”

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