Retirement Outcomes Review final report is set to be published this summer. What will it say?

14 June 2017

Comment from Adrian Boulding, Head of Retirement Strategy at Dunstan Thomas

Within the next month or so, the FCA is set to publish its long-awaited final report from Retirement Outcomes Review, which follows on from February 2014’s TR14/2, Thematic Review of Annuities and its aftermath - the Retirement Income Market Study (RIMS) published in March 2015. RIMS uncovered a number of issues relating to decumulation consumer decision-making following the introduction of Pension Freedom & Choice reforms first announced in the Budget 2014.

RIMS specifically demanded:

1. Annuity quotation comparisons so that when a customer has decided to buy an annuity they can easily identify if they are getting a better deal by shopping around
2. Redesigning information that consumers receive from providers in the run-up to retirement (most notably the Wake-up Pack), and testing modifications to determine if they are changing consumer behaviour.
3. Creating a pension dashboard to allow consumers to see all pension pots in one place by 2019
4. Monitoring by the FCA to track market developments and consumer behaviour and outcomes, as well as take-up of the Pension Wise service. Research that the FCA conducted as regards information prompts at the point of annuity purchase consideration, as detailed in CP16/37 entitled: Implementing Information prompts in the annuity market, published in November 2016, looks interesting:

According to the regulator, the annuity comparison provision led to increased switching from 7% up to 25% and increase of shopping around from 13% to 40%. Clearly, this was a significant find which led onto the FCA pressing initially for annuity comparison capability to be built into Key Facts documentation by 1st September 2017. We were only given clarity that, following industry pushback, this change must now be implemented by 1st March 2018 in the 26th May published PS17/12. Our instinct is that we may well see more product-specific comparative information provision being pushed into regulatorily-required documentation in the future.

This leads naturally on to a deeper look at the Retirement Outcomes Review itself. It focused on four related areas:

1. Shopping around and switching: The FCA is exploring the extent to which consumers can compare the larger range of products/options available to them from age 55 post-Pensions Freedom. Can they compare products easily, shop around, switch providers when they are not being offered what they want and make sound informed decisions?
2. Non-advised customer journeys: The FCA is probing whether in a more complex decumulation decision-making environment, and one in which people are much less likely to have regulated advice today, are consumer journeys to decumulation offerings smooth or is the increased complexity they are confronted with causing them “not to engage or leading them towards “certain products, choices and decisions”?
3. Business models and barriers to entry: As providers adapt to the changes the FCA is exploring what business models and products are emerging and what risks these might pose in terms of reduced competition in the market. How might firms’ business models impact on consumer engagement and switching, and are there barriers to entry to challenger firms?
4. Impact of regulation on retirement outcomes: Are there examples where FCA regulation is overly burdensome and may be inadvertently contributing to barriers to entry or preventing useful product innovation by firms?

The quarterly market data collection exercises which the FCA has been doing, as part of RIMS, over the last couple of years does give us some clues as to what is going on. The last quarter of 2015 figures for income drawdown and annuity sales shows that more than half of customers stay with their existing provider for decumulation purchases: 53% of existing pension holders went on to buy their income drawdown offering from the same provider, while 57% of their annuity customers were from existing policy holders.

The Review is particularly keen to address the question of why consumer switching has decreased since the introduction of the pension reforms.

It’s clear that the impact of RDR is being felt in terms of falling numbers of drawdown and annuity purchases being advised. The number of drawdown sales being advised has fallen from 97% back in 2013 to 68% today. Only 42% of annuity sales involve regulated advice. More worryingly, during the same quarter 52% of all pensions going into decumulation decided to fully cash out.

The FCA is particularly interested in exploring: “Whether a lack of information and comparability of products leads to consumers disengaging, choosing decision-making shortcuts, or making poor decisions. We are also interested in how firms may be able to contribute to or alleviate this complexity (for example, through the design and operation of consumer journeys or product information communication).” One of the major issues thrown up by Pension Freedoms is that it has eliminates the one-off point where most policyholders moved from accumulation to decumulation i.e. at stated retirement date and when an annuity was purchased. Simultaneously we are beginning to see a wider trend amongst people in their mid to late 50s onwards deciding to go into semi-retirement i.e. taking a cut in income in order to improve their lifestyle or embrace a second career option. Many of these people may choose to access their retirement savings earlier now that Pension Freedom allows them to do so. Dunstan Thomas is going to take a closer look at the rise of this semi-retirement trend in its next consumer study over the summer.

This begs the question, is the lack of a clear retirement ‘decision-point’ leading to consumers disengaging and then selecting the perceived easiest option (like taking it all out and dumping the savings into a low yielding building society account), or defaulting to a decumulation product with their current provider without properly considering the alternatives? Is there any other catalyst that will prompt people into taking a long term decision like buying an annuity?

The FCA can see the way the wind is blowing now the regulator, combined with HM Treasury, has created the perfect storm: RDR which stimulated a reduction in the number of regulated advisers able to profitably serve the mass market and Pension Freedoms which made the accumulation-to -decumulation decision-making process considerably more complex (ironically requiring even more regulated advice to navigate it to best advantage). The Retirement Outcomes Review is therefore right to be focused hard on the non-advised consumer journey and steering providers towards easing that journey into sound decumulation decision-making.

In summary and to get the crystal ball out for a minute, it seems inevitable that providers will be forced to re-engineer paper-based and increasingly digital consumer journeys which help decumulating customers make better informed decisions associated with tapping their retirement savings in a mix of ways from full encashment through UFPLS withdrawal, income drawdown, annuity, or perhaps to a new Guaranteed Annuity product. The emphasis on barriers to entry in the FCA studies underlines that they are keen to see plenty of innovation in retirement income space.

Comparison engines aplenty will need to be built into business processes and the decumulation market watch-phrase will need to be ‘simplicity in the face of complexity’. A successful Pensions Dashboard should help create greater transparency and consumer engagement but will require legislation to achieve universal coverage. All this will be a challenge for the industry which I’m sure it’s equal to as technology platforms and tools mature and new fintech innovations rush to meet market requirements.

Adrian Boulding is Director of Retirement Strategy at Dunstan Thomas

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