The regulator made the statement as it published the interim findings of its Retirement Outcomes Review, which was launched in July 2016. It was the first major study into how the retirement income market is changing since the pension freedoms.
Below, Lee Halpin, technical manager, @sipp, examines whether the review has gone far enough and what may lie ahead.
By the time you read this, there will be around six weeks left to participate in the Retirement Outcomes Review (ROR) consultation. Time will no doubt tell whether the latest response to the Pension Freedoms era has delivered effective, proportionate measures or whether it is an opportunity missed.
Clearly, the regulator had to take action on the back of their belief that further support and protection is needed to effectively manage the non-advised drawdown market. But while there are many sensible measures proposed, are they far reaching enough (in combination with the earlier Financial Advice Market Review actions) to tackle the fundamental issues head on?
Some providers have gone to the extreme and suggested that drawdown products should not be sold without financial advice. Only individual companies’ in-house, corporate policies, rather than the regulatory regime, currently informs this practice. By way of an example, only three out of seven of the largest insurers offer non-advised drawdown products to new customers (albeit that ABI member companies sold 94% of their non-advised drawdown sales to existing customers).
But could such an, albeit radical, regulatory requirement actually be viable in practice?
We can however draw a parallel from an adjacent market, where a precedent requiring financial advice to be taken has already been set – the Pension Schemes Act 2015 requires an individual to take financial advice where the cash equivalent transfer value of safeguarded benefits is more than £30,000.
Interestingly, while the ROR found that over half (53%) of pension pots accessed have been fully withdrawn, 90% of these pots were smaller than £30,000. This probably supports the argument that with sensible exemptions (like those where safeguarded benefits are involved) a regulatory requirement to take drawdown advice does not seem too far-fetched or, indeed, impractical.
The matter is however clouded by the significant shift in consumer habits – the evidence to date is that most people have chosen to take lump sums rather than regular income. So there is an argument that it is ongoing financial advice that is needed rather than a one-off exercise. I suspect this consumer behaviour is a major factor in the regulator dismissing any notion of forcing a financial advice requirement where drawdown is concerned.
But whether or not you agree with compulsory advice, I am sure that the majority of the financial services community would agree that more could (or should) be done to promote the value of advice. Only last month, the headline finding from a research report by the International Longevity Centre – UK was that those who took financial advice ended up over £40,000 better off than similar individuals who did not take advice. But in an era of endless news cycles this jaw-dropping revelation was easy to miss, which I suppose is the point.
Previous analysis, this time undertaken by Vanguard in late 2014, suggested that the difference between the overall return that investors might achieve with an adviser on board, compared to what they might have achieved on their own was around 3% per annum.
Whilst neither of these pieces relate specifically to drawdown advice, they are however an emphatic endorsement for financial advice in general.
If many consumers may struggle with the complexity of decisions they have to make in relation to drawdown, engaging an adviser would immediately be a more attractive proposition if they had a clearer expectation of the potential upside. It is a reasonable question to ask what role the regulator should play in the promotion of financial advice.
As a multitude of robo-advice alternatives are springing out of the woodwork, there are serious concerns as to whether they will achieve the traction required and whether they are truly capable of dealing with the complexity of at retirement advice. The jury is out.
Given the scale of some of the problems faced, from general mistrust of pensions to the ‘advice gap’ that is only too evident in the mass market, it may be that until some bold, brave regulatory policy decisions are made, we will not witness any real, tangible progress.
The latest Financial Planning Today magazine is out and available to read below...https://t.co/BBvoXy7IWj pic.twitter.com/wOeisaeG7P
— FP Today Magazine (@FPTodayMagazine) July 17, 2017