‘Time and tide waits for no man’ was probably not written with investment pathways in mind, but those in the pensions industry working furiously to implement them must wish they could slow the relentless march towards P-Day on August 1 2020.
It is now more than six months since the Financial Conduct Authority released the final rules for investment pathways (in policy statement 19/21) and from speaking to defined contribution/self-invested personal pension providers and pension schemes alike, there remain many challenges still to overcome.
In the time that has elapsed since the policy statement, we have had the latest set of data released by both the FCA and HM Revenue & Customs on consumer activity in the retirement income (or pensions flexibility) market.
So, what have people been doing with their new-found pension freedoms?
Well, the main trends that have emerged from earlier data remain broadly intact. The most popular decision is to fully withdraw the DC pot, with 55 per cent of people choosing this option; next comes drawdown with 30 per cent; annuity sales are hovering at just above 10 per cent; and finally, uncrystallised funds pension lump sum is at 5 per cent.
Retirees risk running out of money
Drilling down a bit further, more than £13bn of assets entered drawdown in the 12 months to March 2019 (FCA data), with HMRC reporting that £2.4bn was withdrawn (and taxed) during the third quarter of 2019.
Of those entering drawdown during the 12 months to March 2019 (around 100,000 people), 25 per cent did so having not taken any advice or guidance. Interestingly, data around the use of Pension Wise is now included, and we can see that it is proportionately less popular for those that end up going into drawdown (9 per cent take-up) than those buying an annuity (29 per cent).
Also, we now have more data on withdrawal rates and this shows that 40 per cent of withdrawals were at an annual rate of 8 per cent and above, which even with a high-risk investment strategy means retirees are likely to drain their pot dry in a short period of time.
However, without a more complete picture of an individual’s retirement assets, it is difficult to draw too many firm conclusions around whether this level of withdrawal is sensible.
Investment pathways confusing providers
In among all this activity will be thrust investment pathways and also, slightly confusingly, pathway investments. The former is the process, and the latter is the investment strategy that corresponds to the four pathway options.
Pension/Sipp providers with non-advised customers are busily trying to work out what effect this is going to have on customer journeys, literature and their propositions more generally. And the answer tends to be substantial.
The big questions that are puzzling providers the most are:
- How do you deliver as seamless a journey as possible for customers who move into a pathway investment for the first time?
- Should the pathway investments differ for customers with different withdrawal rates, or attitudes to risk, or ages? There is an option in the FCA handbook rules (and updated Perimeter Guidance Manual) to offer different pathway investments for customers than select the same investment pathway option.
- How do you communicate all of this to customers?
- To what extent should trustees be starting to think about this?
Interestingly, in conversations with clients involved in thinking about pathways, what tends to come up less than you might think is what is the right asset allocation for someone needing to go into a pathway at age 55 (as they’ve decided to take their tax-free cash) and they then stay in there until age 85 or older?
As often with significant regulatory change, how the industry addresses these questions will vary. What is certain, however, is that the nature of retirement is changing and how people successfully navigate through a set of complex financial decisions and products, will be shaped by the developments between now and August 2020.