With the increase in the use of drawdown options, the FCA has recently proposed governance remedies for issues centred on consumers who opt for drawdown without taking advice. These proposals are part of a wider drive for improved governance of workplace pensions and transparency for savers. So how did we arrive at this juncture, and what do providers need to do?
Introducing investment pathways
Following a lengthy review, the FCA has concluded that many non-advised consumers were losing out on retirement income in drawdown through being defaulted into cash investments, even though they had no plans to spend their money in the short term. The FCA’s proposed solution was the introduction of “investment pathways”.
In a nutshell, providers of drawdown solutions will have to provide four investment options (or pathways) for savers moving into drawdown, depending on their intentions:
- No plans to access the money within the next five years (remain invested)
- Make an annuity purchase within five years
- Move into income drawdown within five years
- Fully cash out within five years.
The FCA hopes that this initiative will provide a framework to help consumers make informed choices about their retirement savings, choose appropriate investments in line with their circumstances and plans, and only choose cash investment as an active choice. They also expect that the advent of investment pathways will result in more innovation by providers of drawdown funds, and more choice for consumers.
The FCA has also argued that, to ensure a competitive drawdown market, consumers should be aware of the charges that they are paying (including transaction costs). They have therefore suggested that firms providing drawdown solutions should disclose these charges, and are currently consulting on the exact nature of the rules to ensure such disclosures.
If this is beginning to sound familiar, that’s because an analogous regime already applies to providers of accumulation funds.
The advent of the IGC
Independent Governance Committees, or IGCs, were introduced in 2015, following an earlier Office of Fair Trading (OFT) market study into the wider UK pensions market. The OFT recommended the introduction of minimum governance standards across all DC pensions in order to ensure consistent, effective scrutiny and value-for-money. The FCA responded by mandating that all providers of workplace personal pension schemes should set up and maintain IGCs to assess the costs, charges and value for money of their policies and report to policy holders through publicly available annual reports.
For smaller or less complex organisations, an option exists to establish a Governance Advisory Arrangement (GAA) instead of an IGC.
Extension of IGC’s remit to cover investment pathways
The role of the IGC (or GAA) is to assess value-for-money being provided to customers and make recommendations to the pension provider for improvements and remedies. Their remit ends, however, at the point of retirement, and they do not cover providers of pure decumulation solutions.
The FCA is increasingly aware of the impact of this incongruity and is expected to extend the remit of IGCs and GAAs to include investment pathways from 1 August 2020. This means that all providers required to introduce investment pathways will also need to operate an IGC or GAA. Those with IGCs already in place will simply be required to extend the remit of the IGC, other providers will either have to establish an IGC or sign up to a GAA.
At the same time, the IGC or GAA remit – across accumulation and decumulation – is expected to extend to the providers’ policies on Environmental, Social and Governance (ESG) issues relating to investments, and how member concerns have been taken into account.
IGC versus GAA
When the FCA first proposed the concept of the IGC, PTL highlighted that the cost and resource intensity of establishing a full IGC could be disproportionate for some providers with smaller or legacy portfolios of workplace pensions. The FCA ultimately agreed and allowed firms with smaller and less complex portfolios to join a GAA, essentially an outsourced IGC operated by a third party. GAAs have indeed proven to be efficient and cost effective, whilst still guaranteeing independence and effective oversight.
The FCA clearly acknowledges the merits of GAAs and considers this a sensible option for many providers.
Timelines and next steps
The FCA rules on investment pathways have been finalised (PS19/21) and all firms offering drawdown solutions for non-advised customers must have investment pathways in place by 1 August 2020. The consultation on extending the remit of IGCs/GAAs has concluded, with the final rules expected towards the end of this year. We do not expect the FCA to deviate substantially from the proposals outlined in their consultation (CP 19/15).
Once the regulations have been issued, drawdown providers who do not already have an IGC or GAA in place will have to move quickly to either establish an IGC, or sign up to a GAA. As the timeline is tight, early engagement will be crucial, and many workplace pension providers are already reviewing their options and agreeing their preferred solution now, well ahead of deadline.
This blog first appeared in Pension Funds Insider.