In an attempt to come to terms with the growth of the decumulation market since 2015, so-called ‘investment pathways’ will be offered to those who enter drawdown unadvised from 1 February. Will they succeed in leading consumers through the decumulation wilderness? 

 

The Financial Conduct Authority mandated the change last year in the wake of its Retirement Outcomes Review, having expressed concerns that too many consumers enter drawdown without financial advice. Similar concerns over customers being defaulted into cash by their providers mean there are also new rules around customers needing to take an active decision to hold predominantly cash, and receiving warnings when doing so. 

 

 

People at retirement who opt for drawdown without regulated advice will be asked to choose from four investment pathways as of next month, six months later than originally planned, because of the Covid-19 pandemic. 

 

Consumers entering drawdown without taking advice must be presented with four options for how they might want to use their drawdown pot, expressed in terms of how what the consumer seeks to do, such as, ‘I plan to start taking my money as a long-term income within the next 5 years’. 

 

Providers will also have to send annual information on all the costs and charges paid over the previous year to consumers who have accessed their pension. 

 

The FCA estimated that about a third of drawdown customers have not taken advice when making the decision to go into drawdown. More than half of these non-advised consumers are predominantly holding cash, having been ‘defaulted’ into cash by their provider, and the FCA thinks that over half of them are likely to be worse off in retirement as a result. 

 

The change is being accompanied by a widening of the remit of Independent Governance Committees to cover investment pathways. 

 

 

Pathways will help consumers as many of them struggle to grasp even simple financial concepts or how these might work for or against them, said Laurie Edmans, a member of the Zurich IGC. 

 

Edmans said he has in the past seen some members take their whole defined contribution pension and move it into a savings account with a bank because this was the only way they felt it was really their money. By moving their money from a tax-advantaged, professionally governed pension pot to a taxed cash account, they likely worsened their retirement prospects. “Pathways will help overcome that understandable but economically irrational behaviour,” he said. 

 

Pathways make use of people’s inherent inertia, which Edmans said was “not a bad thing” if it helps to achieve better outcomes. “From a behavioural point of view, inertia is the strongest of the lot,” he said. 

 

Ultimately however, making financial advice more affordable would have been preferable for Edmans. “My preferred solution would be not to have a... regulatory regime that makes proper advice unavailable to anybody but the rich,” he said, given how rapidly retirement responsibility is shifting from the state to individuals.  

 

 

For independent consultant Ian Costain, pathways are “a huge step in the right direction in terms of helping consumers”, saying “most consumers are ill-equipped" to make the complex and important decisions they face at retirement.  

 

“In an ideal world they would have access to regulated financial advice. Absent that, then the pathways help frame, in words that consumers can understand, the possible outcomes which they might be seeking,” he said. 

  

However, the fact that the objective of the fund acts as its label also helps mask the underlying assets, and as a result “issues will surface if the product provider chooses an inappropriate investment fund or does not communicate the risks in a way that a consumer might reasonably understand”, he said. 

 

“In particular, where the consumer has said they’ll be taking a long-term income, it’s imperative that the product provider communicates what sort of level of income might be sustainable – issues will most certainly arise if there are any nasty surprises for consumers, like finding out they might run out of money because of the level of income they’ve been taking,” he warned. The FCA has committed to carrying out a review in 2022 of how pathways are working in practice, a fact Costain welcomed. 

  

He said a light needs to be shone on the solutions that product providers have come up with in support of pathways. “Are the investment solutions they’ve chosen appropriate, and do their communications adequately describe the risks to consumers?” he said. "These are the aspects which will be the determinant of whether or not the consumer achieves a good outcome.” 

 

 

Some in the industry have more mixed views on the matter. Whether pathways will help or hinder consumers is “an open question”, said independent consultant Malcolm McLean.  

McLean said he accepts that more should be done to help people make better informed decisions at the decumulation stage but is not convinced the investment pathways as currently designed will necessarily achieve that.  

 

“They certainly won’t replace the personalised recommendations from an approved financial adviser on where to invest and how much income can safely be taken to last throughout life. I am not sure consumers will always fully appreciate this and could lose out in the final analysis in consequence,” he said. 

 

But since pathways are now set to be introduced, the focus for the FCA should lie on monitoring them on an ongoing basis and “be prepared to adjust or even scrap them as necessary in the light of their findings”, he added. 

   

McLean would have liked to see a system of mandatory guidance instead of pathways, delivered by an independent body like the Pensions Advisory Service as a minimum substitute for full financial advice. Pension Wise, through TPAS and Citizens Advice, offers a single guidance session to over-50s, but this is not mandatory at the moment. 

 

Steven Cameron, pensions director at Aegon, is also ambivalent about the pathways. “For some people, their plans may be clear, and they may be able to identify a retirement scenario. For others, including individuals over 55 who may have lost their job as a result of the pandemic, it may be difficult to think as far ahead as five years,” he pointed out. 

  

“What’s right for one person may be much less so for another depending on how much income an individual plans to take when, or if they are planning to buy an annuity at a later date,” he said. 

 

He also pointed to the inherent complexity of drawdown. “Investment pathways will not provide any help in deciding how much income to take," he cautioned. “While investment pathways will offer some help to those who choose to ‘go it alone’, it’s really important to understand that they won’t replace the benefits of taking professional financial advice.” 

 

 

Ian Costain

Malcolm McLean

Steven Cameron