The mobile industry moves towards 5G with a degree of controversy over contracts. With greater calmness, drawdown within the “non-advised” workplace pensions market moves towards “3G”.
I make a distinction between advised and non-advised schemes because the Financial Conduct Authority (FCA) certainly are. The current proposals out for consultation would require all providers with a material number of policyholders moving into non-advised drawdown to provide at least four “investment pathways” in drawdown by 2020.
To provide the “masts” or “infrastructure” for contract-based workplace pensions, these will be the rules.
2020 will see a vast expansion of the options available to members. Out of four specified investment pathways, customers will be asked to consider which may be most appropriate for them. Drawdown solutions meeting these solutions will be mandatory. Of course, customers can choose none of these and providers can offer other additional solutions, as not everyone falls into one of four categories.
‘1G’ was pre-existing before Freedom and Choice in 2015 – a small market within specified limits, with most policyholders advised. ‘2G’ is the 2015 to 2020 market – this period saw some evolution and an increasing number of non-advised drawdown customers, but with pathway solutions developing slowly.
Development was too slow for the FCA however, who is concerned that non-advised customers may make non-optimal choices of investment funds in drawdown. Many merely leave investments as they are at the point of retirement, or transfer them to funds that may not necessarily meet their income needs throughout retirement. There’s a danger that some individuals may be over or under-cautious, or not possess the knowledge to match investment profiles to their needs – if indeed they have a ‘view’ on their needs.
Providers hands are being forced: move to 3G. The FCA is gearing up for Independent Governance Committees (IGC) to assess value for money of the new pathways from 2020/21. Because all providers must deal with the same four self-identified pathways, comparisons of construction and costs will be facilitated.
Trust-based schemes or master trusts may have to follow suit, although nothing has yet been announced on that score. Even without strict requirements, it could be argued that having solutions in place for these pathways will become part of the value for money equation for trustees, or the lack of them a corresponding detriment to value received.
The final FCA rules are expected in July, and providers are starting to prepare. Only time will tell how well these are perceived, but a step change it will be regardless. We should hope these pathways, if well designed, will become available for advised customers too!
One could say this is about time too but, being fair to the pensions industry, a move to 3G six years after Freedom and Choice comes over two decades’ quicker than it took the mobile market to reach 5G...
Finally, with ESG matters developing fast, and proposed IGC assessment of provider’s ESG policies and implementations too, there looks to be even more evolution in the pipeline.
Sometimes, new requirements are not always easy to classify as beneficial – this one appears needed and sensible right from the outset.
Colin Richardson, Client Director, PTL.
