Pensions freedoms where are we now?

22 July 2016. Published by Rachael Healey, Partner

On 14 July 2016, the Financial Conduct Authority (FCA) published three releases relating to pension freedoms. The releases provide an insight into the FCA's areas of concern following the introduction of the pension freedoms in April 2015.

The most substantive of the three releases was the terms of reference for the Retirement Outcomes Review.  The review's aim is to assess the impact of the pension freedoms on competition within the retirement income market and to look at the responsibility of firms and consumers in relation to the freedoms. 


The review is targeted at the decumulation phase; this is the phase of converting assets held in a pension pot into a fund for a pensioner's desired lifestyle.  The review will focus on annuities, income drawdown, hybrid products and uncrystallised pension fund lump sum cash withdrawals.  Defined benefit pensions, equity release products and individual savings accounts fall outside the scope of the review. 


The FCA has been collecting data on a quarterly basis from a representative sample of pension and retirement income providers and this data is presented as the backdrop to the review.  The data for October to December 2015 provided that:


  • more than half of consumers are staying with their existing pension provider;

  • high numbers of consumers are entering into income drawdown products without the use of a regulated advisor, with 32% of reported draw down sales not associated with a regulated advisor, compared to 3% of sales in 2013 before the pension freedoms were introduced;

  • a significant number of consumers were taking full encashment or making high rates of cash withdrawals from their pension savings; 52% taking full encashment, 29% drawdown and 17% annuities.

In light of these findings the FCA are concerned about the ability of consumers to make informed decisions and place competitive pressure on firms in light of increased choice and complexity and increased mass market access to high risk products.  These concerns were highlighted in the retirement income market study of March 2015 and the FCA considers that the data to date shows that these concerns have been borne out in practice.

Given these concerns the review is to look at four areas:

  1. Shopping around and switching. The FCA has identified that consumers have been missing out on higher income by not shopping around for their retirement product which is a particular issue in relation to annuities. The aim of the review is to explore whether there is a more acute issue post pension freedoms in relation to consumers' ability to compare their options and shop around.


  2. Non-advised consumer journeys. The introduction of the pension freedoms has introduced a greater degree of flexibility and also complexity for consumers, such that the decision about a retirement product is no longer a one off decision. The review is to study the non-advised consumer journey and assess whether consumers are inhibited or discouraged from making informed and impartial decisions.


  3. Business models and barriers to entry. The report notes that the pension freedoms have opened up possibilities for firms to enter or expand into retirement income markets. The aim of the review is to understand the extent to which the critical mass of customers and/or customer acquisition continues to be a barrier for new entrants into the market.


  4. Impact of regulation. The review also invites responses on whether or not FCA regulation is acting as a barrier to entry or expansion and the extent to which it disproportionately increases costs or deters innovation.

The deadline for responses is 31 August 2016 and the intention is for a final report to be published in the Summer of 2017.  This final report will follow the introduction of the lifetime individual savings account and the secondary annuity market which are both due to be introduced in April 2017.

On 14 July 2016 the FCA also published press releases in relation to (1) signposting pension guidance and (2) a new annuity comparator.

Most interesting was the annuity comparator press release which sets out the FCA's findings in relation to a proposed comparator designed to provide targeted information to consumers at the point of purchase and highlight the benefits of shopping around.  The FCA's findings indicate a positive response to the comparator and it is possible that the comparator will be introduced as part of a range of changes aimed at the areas the FCA has identified as part of the retirement outcomes review.

The retirement outcomes review and press releases are part of a wider programme in which the FCA is reviewing the advisory market and is largely driven by the introduction of the pension freedoms.  Having focused on the introduction of those freedoms the FCA is now turning its attention to how those freedoms have bedded in and what improvements can be made.  Changes are to be expected when the final report is published in Summer 2017.

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