Our focused review on rationale and take-up, value, communications and asset allocation for investment pathways, and how these could impact consumer outcomes.
1. Executive summary
Deciding how to use pension savings is one of the most important financial decisions people will make. Pension freedoms provide greater flexibility in how and when consumers can access their pension savings, but they require consumers to make more complicated decisions about their retirement. Alongside this, consumers will increasingly rely on defined contribution (DC) pensions as the major source of retirement income, placing greater responsibility on the individual.
We introduced investment pathways[1] to address specific issues identified in the Retirement Outcomes Review (ROR)[2], particularly when consumers were focused on accessing their tax-free cash. Many of these consumers were taking the ‘path of least resistance’ and entering drawdown with their existing provider, with some providers ‘defaulting’ consumers into cash or cash-like assets.
Through our desk-based research, we consider investment pathways to be working as intended to address the specific harms identified in the ROR and to set a foundation of support. But we recognise there is more to do to support consumer decision-making. Importantly, we need to take a holistic view of how to support consumers through their journey. These workstreams are set out in section 3.
On 11 July 2023, the Department for Work and Pensions (DWP) published its response[3] to the products and services elements of the ‘helping savers understand their pension choices’ call for evidence[4]. This includes a consultation on a policy framework to ‘support individuals use their pension savings in decumulation’.
We want consumers to get the same good outcomes, regardless of scheme type. We will work closely with DWP and The Pensions Regulator (TPR) to align, where appropriate, across the pensions market as we progress our respective thinking and regulatory initiatives in this area – including the advice / guidance boundary review we are undertaking with the Treasury.
2. Findings
2.1. Background
Investment pathways support non-advised consumers to align their drawdown investment with their retirement objectives, with a focus on consumer choice. Firms in scope must present these consumers with 4 options over a 5-year time horizon:
- Option 1) I have no plans to touch my money.
- Option 2) I plan to use my money to set up a guaranteed income (annuity).
- Option 3) I plan to start taking money as a long-term income.
- Option 4) I plan to take out all of my money.
Investment pathways were implemented in February 2021. This followed publication of the Retirement Outcomes Review Final Report[5] in 2018 and our final rules and guidance (PS19/21)[6] in 2019.
We said we would review the impact of our rules in a post-implementation review of investment pathways. But we also recognised that investment pathways are a relatively new intervention, and they relate to long-term products, therefore metrics on the impact of our rules on consumer outcomes are limited.
We have therefore conducted a focused review, undertaking desk-based research on rationale and take-up, value, communications and asset allocation, and how these could impact consumer outcomes. These reflect the core themes identified when extending the remit of Independent Governance Committees (IGCs) to assess the value for money of investment pathways in IGCs: extension of remit (PS19/30)[7].
Our review included analysis of:
- trends in the pensions market
- publicly available industry data and research on take-up and functioning of investment pathways
- qualitative feedback to the DWP’s call for evidence[4] on helping savers understand their pension choices
We also reviewed IGC reports. However, some reports said, as they were only introduced in 2021, it was too early to properly assess the rollout and value of investment pathways.
This report also builds on an initial supervisory review, from 2022, of firm compliance with the relevant rules and guidance. This focused review found that firms were largely compliant with the requirements and had reasonable governance and processes in place.
2.2. What we found
For the reasons they were introduced, stakeholders generally view investment pathways as a positive intervention, particularly in preventing poor outcomes, such as consumers being invested in a way that does not align with their objectives. The varied take-up of the different options available – albeit with a lower proportion of consumers choosing option 2 – suggests support for more structured options, making the decision simpler for consumers. The Association of British Insurers (ABI)[8] also supports this finding.
The decisions required at the point of accessing pension savings are complex and present the potential for consumer harm. As set out above, pathways act as a foundation for further support, addressing a specific harm. The rationale for investment pathways therefore remains valid. However, we recognise there is more to do to support consumer decision-making.
ABI data shows pathways take-up at 50% in Q1 2023. We see this as positive evidence given the low levels of consumer engagement identified and short time since implementation.
However, based on publicly available data including IGC reports, industry research and public reporting, take-up varies significantly across different providers. This could be for several reasons, including:
- the specific markets served by different providers
- how firms communicate investment pathways
- whether firms require consumers to use investment pathways
This echoes the findings of the initial supervisory review of firm compliance, which found that some firms reported only modest numbers of people using investment pathways. We will look to gain a better understanding of take-up and the reasons for variation across different providers.
IGCs: We tasked IGCs with assessing the ongoing value for money for pathway investors, whether communications to members are fit for purpose and to properly consider their characteristics, needs and objectives and whether the pathway investment is designed and managed in the interest of investors. Most IGCs welcomed investment pathways. The majority of IGC reports reviewed also demonstrated evidence of firm challenge where necessary on issues such as charges and communication and that action was taken following that challenge. However, the breadth of data presented on investment pathways across different IGC reports is variable.
Communication: The majority of IGC reports reviewed as part of the post-implementation review assessed their provider’s communications to be fit for purpose but various IGCs highlighted areas for improvement, including more specific information on risk. Desktop research also showed variation in the communications provided to consumers. This included using online journeys and tools and calculators, as well as how the risk of different options were communicated. Such variation could affect take-up and consumer understanding.
Value: Ensuring that pension schemes deliver value for money doesn’t just mean low costs and charges. It also means that consumers get good value from their investments and receive a quality level of service.
We did not set a charge cap for investment pathways but suggested that firms use the charge cap on qualifying schemes for pension accumulation of 0.75% as a point of reference. We also recognise the Work and Pensions Select Committee recommendation[9] that a charge cap be introduced within investment pathways.
The majority of IGC reports assessed their provider offering value for money options and evidenced challenge where charges were above the 0.75% reference. In some circumstances, the firm conducted a review of costs and charges. This aligns with the public data available, with average charges in the market generally below the 0.75% reference.
We have no plans to introduce a charge cap. However, we have identified value as a key risk and will incorporate it into our ongoing supervision of firms offering investment pathways. Further information on our value for money work can be found in section 3. The Consumer Duty[10] also sets higher expectations of firms to assess their products and services to ensure there is a reasonable relationship between the price paid for a product or service and the overall benefit a consumer receives from it.
Asset allocation: IGCs generally assessed the design and risk and return characteristics of pathway solutions as being in line with their stated objectives.
We are working closely with DWP as it develops its proposals for supporting consumers in decumulation in the trust-based market. We are committed to ensuring members receive support to achieve good outcomes, regardless of scheme type, while bearing in mind the consumer’s individual needs and the different legal frameworks within which we, and TPR, operate.
DWP’s wish to support occupational pension members with a range of options when accessing their pensions builds on our investment pathways. Our further work in this area is linked to the advice / guidance boundary review and this will inform our approach. See further information on this in section 3.
Over the longer-term, we will continue with our close work across the market to deliver on the live workstreams in section 3, taking account of the lessons learned from DWP’s consultation feedback and the rollout of regulatory interventions and industry feedback.
3. Building on investment pathways
Investment pathways focus on a specific point in retirement decision-making for non-advised consumers. They were not intended to solve all complex retirement decisions consumers need to make. We know there is more we, and industry, can do to support consumers throughout the pensions journey. Following the introduction of our stronger nudge rules[11] in June 2022, we have the following workstreams to address this.
3.1. Consumer Duty
The Consumer Duty sets higher expectations for the standard of care firms give consumers, including in relation to consumer understanding, consumer support, product and services governance, and fair value. Consumers need greater support to make effective, timely and properly informed decisions about their retirement and accessing pension savings.
Firms should consider the most appropriate way of supporting their consumers in decision-making throughout their journey and equipping them to make effective, timely and properly informed decisions. We have set out our expectations for supporting pensions and retirement consumer decision-making in the context of the Consumer Duty, in the Dear CEO letter to life insurers[12] on implementing the Consumer Duty (annex 2, section 3) and the corresponding Dear CEO letter to consumer investment firms[13]. This has considerations for all pension providers.
We continue to keep this area under review and may supplement and/or enhance expectations under the Duty over time.
3.2. Behavioural field trials
We are working with industry on behavioural field trials to test touchpoints for engaging customers with their pension, with a focus on decumulation. Given there are many ways and times to try to engage consumers, we want to add to the sum of knowledge in this area, rather than developing a specific way to engage consumers.
Firms will also need to continue to test and innovate their approaches to engaging customers to comply with the Consumer Duty.
3.3. Advice / guidance boundary
The advice / guidance boundary is a key consideration in how firms support consumers when deciding how to access their pension savings. While we have announced a review of the boundary between advice and guidance jointly with the Treasury, we think there is more that pension providers should be doing now within the existing framework.
As noted in the Dear CEO letters on implementing the Consumer Duty for life insurers[13] and the consumer investment sector[14], under the Duty, firms are required to enable and support retail customers with their financial objectives, and to provide them with information that supports effective decision making.
Where customers are dealing with complex products or decisions, for example pensions and retirement, firms should not be reluctant to provide support because they are being overly cautious about coming closer to the boundary between regulated financial advice and guidance. With industry, we have been exploring concerns about providing pensions support with a view to addressing any misconceptions or issues that can be resolved without change to the current boundary and to inform future discussion about whether further legislative change is required. This work and our learnings from it are now being taken forward as part of the advice / guidance boundary review.
The boundary review is an opportunity to gather a detailed understanding of how the boundary is operating and its effect on consumers, which will inform any necessary changes going forward. Pensions decumulation (excluding transfers of defined benefits and pensions with safeguarded benefits) is within scope of the review, which therefore has the potential to affect how firms can support their customers’ decumulation choices in the future. The review may also affect how firms can present and develop their investment pathways offering.
3.4. Other initiatives
There is also a range of other initiatives that are relevant to supporting consumers:
Retirement income advice thematic review: Our thematic review[14] is exploring how financial adviser firms are delivering retirement income advice and assessing the quality of outcomes consumers are getting. Where appropriate, our guidance requires firms to consider investment pathways when giving advice, but there is no requirement for firms to offer these. It is expected that the review findings will be published around the end of 2023.
Pensions dashboards: These will allow consumers to find their pensions and view basic information about them. These have the potential to transform how consumers engage with their pensions. With the information that dashboards will provide, consumers could be better able to plan for their retirement, get advice or guidance at the right time and ultimately make better informed decisions.
Value for money: On 11 July 2023, DWP published our joint government-regulator response[15] to our joint consultation on a new value for money framework for DC pensions. Trustees and providers will be required to publish data on prescribed metrics for investment performance, costs and service quality. They will also be required to use this data in an objective, holistic process for assessing value for money and take immediate action if a scheme is underperforming. While the first phase will focus on default accumulation arrangements in workplace schemes, we will consider how, over the longer-term, to extend the framework to decumulation.