FCA proposals to compel retail pension providers to offer a default ‘lifestyle’ fund have been criticised by AJ Bell.
These proposals aim to bring non-workplace pensions in line those offered via the workplace. But AJ Bell, said that while a default strategy could help non-advised customers, lifestyling is not the optimal solution.
In response to the regulator’s consultation, which closed last week, the platform provider says ‘lifestyling’ — were member funds are automatically moved into less risky assets as they approach retirement — was outdated, having been introduced more than fifteen years ago for workplace pensions, at a time when the majority bought annuities at retirement.
It claims this investment strategy has been superseded by the advent of pension freedom rules. In addition to its specific criticisms about lifestyling it adds that offering just one default option risks “hard-wiring inertia” into the retail market, and could lead to poorer investment returns.
AJ Bell head of retirement policy Tom Selby says there was a danger that savers, who keep their pension fund invested after retirement could lose out under these proposals, particularly with inflation rising.
He says: “After a decade of relatively benign inflation, surging global gas prices combined with the re-opening of economies around the world has seen prices in the UK spike to a 30-year high. Indeed, inflation is expected to rise still further in 2022 and peak at over 7 per cent in April.
“In this context, ensuring savers with a long-term time horizon invest their money sensibly – in part to combat the deleterious impact of rising prices – is of paramount importance.”
He says that making investment choices simpler and providing nudges where potentially poor decisions are made could lead to better outcomes, and larger retirement pots for savers.
He adds: “The danger with offering a single default is that people who might otherwise have engaged will simply opt for the easiest option.
“This could mean people end up investing in a sub-optimal fund for decades.”
He adds: ““The FCA is proposing that firms should build ‘lifestyling’ into the design of non-workplace default investment solutions.
“The idea of lifestyling was originally based on someone converting their entire pension into an annuity at a set retirement age – usually state pension age.
“However, since 2015 the retirement income market has flipped, with most people entering drawdown and keeping their pot invested.
“The extra flexibility created by the pension freedoms means people access their pension at different points in time and at different rates, meaning there is no clear point in time to de-risk a default towards.
“If someone is de-risked inappropriately – either too early or too late – this will lead to sub optimal retirement outcomes. Both will inevitably happen under the FCA’s plans.
Selby adds: “A small range of risk-managed funds, combined with education and nudges at appropriate ages could help non-advised customers implement their own de-risking strategy to suit their individual circumstances and needs.
“This could have the added benefit of boosting engagement among savers who plan to enter drawdown.”
AJ Bell adds that they agree with the FCA proposals though to compel pension providers to send warnings to customers who remain predominantly invested in cash for long periods of time.
Selby says: “We agree with the intention behind these FCA plans. Holding too much of your pension in cash can lead to disastrous outcomes, particularly over the long-term.”
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