The U.K. financial watchdog wants to further investigate whether additional protections are needed for participants who want to access their retirement savings.
The Financial Conduct Authority published the interim findings of its Retirement Outcomes Review on Wednesday. The review, launched last July, studies how the U.K. retirement income market is changing since pension freedoms were introduced in April 2015, allowing greater and easier access to retirement savings. The changes mean participants are no longer required to purchase an annuity to provide retirement income.
The FCA identified five issues in the changing retirement market, including a lack of advice accessed by participants when drawing down their defined contribution accounts. Prior to the freedoms, 5% of drawdown products were purchased without advice, vs. 30% now, said the FCA. "Drawdown is complex and these consumers may need more support and protection," said the review.
The FCA also highlighted the potential for weakened competition in the provision of annuities in the U.K., as providers continue to withdraw from the open annuity market.
The watchdog said it will gather evidence on whether participants pay high fees and have ended up with unsuitable investment strategies as a result of greater access to their retirement savings. It said 53% of DC accounts accessed by participants have been fully withdrawn, with 52% of those moved instead into other savings or investments, rather than being spent. "Some of this is due to a lack of public trust in pensions," said the FCA. Transferring the money from DC plans, which benefit from tax savings, and into certain savings or investments "can result in consumers paying too much tax, missing out on investment growth or losing out on other benefits," added the FCA. It also said a lack of product innovation in the retirement market was an issue.
The FCA is asking for feedback on the initial findings and recommendations from the industry. It aims to publish its final report in the first half of next year.
"The findings of this interim report are a much-needed addition to the debate around freedom and choice," said Gavin Perera-Betts, chief customer officer at the £1.8 billion ($2.3 billion) National Employment Savings Trust, London, in a reaction statement. "NEST is supportive of any moves which both encourage product innovation as well as improving the protections of any consumers transitioning into retirement without advice — in particular the provision of default pathways that provide for those who cannot or do not engage with investment decisions."
The full review is available on the FCA website.
Sophie Baker contributed to this story.