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FCA eyes ‘default’ investments for non-workplace pensions

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The Financial Conduct Authority has put forward proposals to introduce a ‘default’ investment option for non-workplace pension customers.

The regulator believes the move will improve outcomes for this client segment.

This is because non-workplace pension holders are forced to pick their own investments, and as the option pool keeps getting wider, making harder for them to choose the solutions that meet their retirement needs, especially if they do not take financial advice.

Under the proposal, the default option would be “an appropriately diversified basket of investments” that take into account climate change and other ESG issues. Investments would also change to shield clients from market downturns as they approach retirement.

Pension providers will also play their part, the FCA said, with warnings regarding holding high levels of cash prompting clients to consider other assets.

“The aim is to ensure pension savers have as big a pension pot as possible at retirement,” the regulator added.

The consultation will be open until 18 February 2022.

Sarah Pritchard, the FCA’s executive director for markets, said: “People spend decades working hard to build up a pension to support them in retirement, and we want their savings to work just as hard for them.

“These proposals will ensure that customers who don’t take financial advice can benefit from a professionally designed investment strategy, and reduce the risk of their retirement income being eroded by inflation.

“The proposals form part our wider work on pensions which is designed to ensure that customers are better supported throughout their pension journey.”

Impact on advice market?

While Becky O’Connor, head of pensions and savings at Interactive Investor welcomed the move, she said this should come hand in hand with access to good research

“It is true that there is a huge choice of funds, trusts, ETFs and direct equities out there for those who want to make their own choices. Investors can also face choices between different asset classes, geographies and themes.

“That’s why access to good research and education is so important. For some confident investors, this ability to make their own informed choices, based on their own goals and timeframes, is the appeal of a Sipp.”

But Andrew Tully, technical director at Canada Life, said the regulator’s decision should not impact the financial advice market

“Helping non-advised customers make good investment decisions, and not simply hold pension funds in cash over the long-term, are 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. It also seems a little odd that the FCA suggests default funds should include life-styling.

“Many clients will move into drawdown as they start to access their pension, and life-styling may not be an appropriate choice in those circumstances.”

Better outcomes

Tom Selby, head of retirement policy at AJ Bell, added that nudges from provider could actually improve outcomes for clients.

“With inflation threatening to rampage through the economy, ensuring savers with a long-term time horizon invest their money sensibly is hugely important,” he said.

“While people who choose to invest in a non-workplace pension have by definition exhibited a level of engagement, there is a risk that some will either subsequently become disengaged or struggle to make good choices about where to invest their hard-earned retirement pot.

“In a worst-case scenario, they will end up shoving all their pension in cash and risk their money being eaten away by inflation.

“Having a default fund which is broadly suitable while also issuing warnings to those who invest in cash over long time periods could therefore help improve outcomes.

“Care will need to be taken in ensuring 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.

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