Last year the FCA undertook a thematic review of annuities[1] and found many consumers do not shop around and are missing out on a more generous retirement income. On 14 February 2014 we launched a market study into retirement income[1] to explore measures to improve shopping around, and to investigate other aspects of the market that did not seem to be working well, such as the limited choices on offer for those with small pension pots. This work included a review of firms’ retention strategies and sales techniques. The study also covered other products purchased from accumulated pension pots such as income drawdown.
What has changed?
The Government’s Budget announcement[2] on 19 March 2014 made significant changes to the rules governing choices at retirement.
The Government announced that it will legislate to allow, from April 2015, individuals from the age of 55 greater freedom as to how they access their Defined Contribution pension pot. The options (either individually or in combination) available to consumers drawing benefits from April 2015 will be to:
- Purchase an annuity or alternative retirement income product.
- Take income from their pension pot.
- Fully withdraw their pension pot, subject to tax at their marginal rate.
To support consumers in the new at-retirement landscape, the Government announced the creation of an impartial ‘guidance guarantee’ - free and impartial guidance to consumers on their retirement options.
In the shorter term, a number of measures also announced in the March 2014 Budget, have already been implemented. These are primarily aimed at broadening the options available to consumers with relatively small pension pots, but also include changes to the capped drawdown limit. We have published Guidance[3] to firms on these interim arrangements which will help to ensure customers are being treated fairly before the wider changes come in to effect next year.
What this means for the FCA’s work on retirement income
The FCA is working closely with Government, industry and consumer groups on the ‘guidance guarantee’. We will consult widely about the detail over summer, and will publish our final recommendations by the end of 2014.
We have taken stock of our other work on retirement income, and concluded that the market study and related supervisory work on retention strategies and sales techniques should continue, albeit with a revised scope. The aim will be to set the regulatory approach to retirement income so as to address ingrained issues in the market, while also taking account of potential developments enabled by the Budget changes.
In particular, although the impact of the Government’s reforms will take time to unfold, we expect a number of people will still choose to purchase an annuity at retirement. We will therefore look to address longstanding concerns around value for money, switching and retention strategies in this market. This will include the supervisory work on retention strategies and sales techniques.
The supervisory work will to look at pension providers’ retention strategies and sales techniques when selling annuities to their existing customers, and should we find any issues we will work with firms to address these. Good and poor practice identified through our review will feed in to the market study and will now also form part of the evidence-base for the development of the guidance guarantee.
The ‘guidance guarantee’ work will help address some of the issues around consumer engagement and switching. However the guidance is just one stage along the journey to retirement and we need to understand how consumers approach retirement decisions in a broader sense.
The reforms give rise to a new set of questions around what products might emerge in future, and how consumers will navigate a wider set of choices at retirement. It is important that FCA is forward-looking in identifying any vulnerabilities or risks to consumers and acts promptly to mitigate these.
There are other aspects of the work that we will be able to scale back. For example the issue around limited choice in the annuity market for people with small pension pots is less of a concern now, given alternatives available to them. We have already reduced the amount of information requested from industry.
For more information on the scope and objectives of the market study, please refer to our updated Terms of Reference[4].
In light of the revised scope of the market study, we are seeking views by 18 July 2014 on whether competition in the retirement income market is working in the interests of consumers and is likely to do so in the new at-retirement landscape. Please refer to our Terms of Reference[5] for more information and contact details.
Next steps
We will continue to engage with market participants, consumer bodies and other interested stakeholders over the coming months.
Given the impact of the Budget, we no longer intend to publish our interim market study report in the summer. We now intend to publish this, and our other work on retirement income later this year.