Providers of popular pension products will have to make their charges clearer under a range of measures designed to protect “DIY” investors from making poor investment choices or being ripped off through high fees.
Proposals unveiled by the Financial Conduct Authority will make product fees easier to understand and ensure they are more prominently displayed for investors in “drawdown” pensions, where savings are invested rather than turned into a secure income, like an annuity.
The watchdog’s intervention came after major changes to tax rules in 2015 gave over-55s full freedom over how they invest and access their retirement pots. This vastly increased choices for consumers, many of whom have limited investment knowledge or experience.
Since the rules changed, sales of drawdown pensions by “DIY” investors — those making decisions without the help of a professional financial adviser — have exploded, with sales of annuities slumping. But there is evidence that many are putting their retirement pots at risk.
The FCA has found that investors have been bamboozled by complicated product choices and fees, with some drawdown plans having as many as 44 charges linked to them.
“Our proposals will make firms tell consumers the charges they have actually paid . . . and aim to protect consumers from paying too much in fees and charges,” said the FCA on Monday. “We hope increased transparency will increase competitive pressure.”
The move was welcomed by some industry figures. “Increasing information about fees and charges is something the industry has been working on for some time and we support the FCA’s proposal,” said Rob Yuille, head of retirement policy with the Association of British Insurers, the trade body for pension providers.
But campaigners said the new measures did not go far enough. “While the regulator has taken steps to improve transparency on the costs involved with a pension drawdown, it is disappointing that the FCA has failed to recognise the need for a cap on charges to stop millions from sleepwalking into costly products that could drain their retirement income,” said Gareth Shaw, head of money at Which?, the consumer advocacy group.
Consumer groups had urged the FCA to impose a cap on drawdown charges after saying in 2018, that investors “might” be paying too much. Charges on popular workplace funds, where savers are still building their retirement pots rather than drawing on them, are currently capped at 0.75 per cent.
On Monday the FCA said it “may move” towards capping drawdown charges, if a review of the market a year after its proposals had been implemented, in 2020, still identified “issues”.
Some industry figures also said the regulator should have gone further to curb the risk of customers getting ripped off by high charges.
“We are already seeing parallels in drawdown with the sale of annuities products prior to 2017, where despite an open market option, consumers rarely looked around for the best deal,” said Mark Jaffray, partner and head of DC consulting at Hymans Robertson, a professional services firm.
“The FCA addressed this problem by forcing providers to share details of the best available quote in the market for an annuity, actively promoting the value from shopping around. Given that the vast majority of people now opt for drawdown over an annuity product it’s madness that we don’t have the same measures in place.”
The watchdog’s analysis found that many DIY investors “struggled” to make investment decisions. This led to them either ending up in their provider’s ‘default’ drawdown option or making a poor investment choice.
It also found that one in three consumers who had gone into drawdown was unaware of where their money was being invested.
According to new data released by the FCA as part of the same review, 96,000 plans went into drawdown in the three years following “pension freedoms” in 2015, and up to 35,000, or more than a third of these plans, went into drawdown without the consumer taking advice.
The FCA found that 7,638 (22 per cent) of those non-advised consumers’ plans were predominantly invested in cash.
Other proposals unveiled in the consultation document were for firms to offer “ready-made” investment solutions or investment pathways to the estimated 100,000 customers that enter drawdown without the help of a professional adviser.
Providers will also have to tell drawdown customers each year how much they had actually paid in pounds and pence, and inclusive of transaction costs. There is currently no requirement for firms to provide information on ongoing pensions charges.
The FCA is also proposing that consumers’ pension investments are not defaulted into cash savings, which must be actively chosen by the customer. It has proposed further changes to the “wake up packs” that must be given to consumers as they approach retirement.
The watchdog estimates the combined impact of its measures could help return around £25m a year to savers’ retirement pots.
“The pension freedoms give consumers more flexibility in how and when they can access their pension savings; but that also means they have to make more complicated choices,” said Christopher Woolward, executive director of strategy and competition at the FCA.
“Our proposals on investment pathways will help non-advised drawdown consumers select from four relatively simple choices, designed to meet their broad retirement objectives so that they can maximise their income in retirement”.