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Regulation

FCA floats ‘investment pathways’ to help retirees better manage retirement savings

The U.K. Financial Conduct Authority proposed Monday that investment firms offer ready-made decumulation strategies, dubbed investment pathways, to savers who enter drawdown without taking advice.

The U.K. regulator also said it wants providers to stop defaulting retirement savings into cash investments unless participants choose it.

The move follows FCA's earlier concerns and consultation on decumulation strategies and is aimed at helping plan participants to boost retirement outcomes by about £25 million ($32 million) a year, according to the FCA.

In June 2018 the Financial Conduct Authority sought industry input on drawdowns, after finding that savers could receive 37% more income in retirement annually by keeping their savings invested instead of taking a lump sum. Under the U.K. 2015 retirement legislation, plan participants can select annuity, cash or a drawdown as they enter retirement.

"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 maximize their income in retirement," Christopher Woolard, executive director of strategy and competition at the FCA said in a news release.

"Our Retirement Outcomes Review identified that many consumers are focused only on taking their tax-free cash and take the 'path of least resistance' when entering drawdown," Mr. Woolard said in the release. The result is that savers' pension pots are not invested in way that best suits savers, he said, noting that 1 in 3 consumers in drawdown are unaware of how their funds are invested.

Drawdown providers operating in the U.K. currently are not legally required to supply fee information to plan participants. As part of its proposal, the FCA is seeking feedback on fee requirements by April 5, before it moves to finalize rules by April 6, 2020.

Responding to the FCA's proposal, Mark Jaffray, partner and head of DC consulting at Hymans Robertson, said in an emailed comment: "Greater transparency around charging will be a welcome benefit for many. Explaining a clear first year charge in pounds and pence will allow consumers to compare offers more easily across a number of providers and encourage them to actively shop around as a result."

There are parallels in drawdown with annuity products prior to 2017, where consumers rarely looked for better pricing, Mr. Jaffray noted in the email. "Given that the vast majority of people now opt for drawdown over an annuity product," he said, "it's madness that we don't have the same measures in place."