Targeted support for pensions: Better is best

As those approaching, and at retirement, in the UK navigate an ever-evolving pension landscape there is a clear need to support them to make financial decisions meet their goals. The FCA’s proposals¹ for enhanced consumer support to bridge this knowledge gap are crucial; however, as the industry moves towards implementing more targeted support, there may be challenges in striking the right balance between regulatory intervention and consumer autonomy.

Mind the gap

The figures are stark. Almost 900,000 DC pension pots were accessed for the first time in 2023-24. And yet 34% of consumers aged 50-69 with a DC pension in accumulation had never heard of income drawdown, and 32% had never heard of a single life annuity. While there are many millions of people who could benefit from some form of financial advice each year, FCA research shows that around just 8% of consumers will access financial support in a given year.

Great (consumer) expectations

Sitting between generic guidance and holistic financial advice, the FCA’s proposals for targeted support have the potential to bridge a sizeable part of the pensions advice gap. Indeed, research conducted for the FCA as it developed its proposals showed a degree of surprise, even dismay, among consumers that pension providers are not already obliged to offer this type of service.  For some consumers, free, targeted support at the point of accessing their pension – through one of the most complex financial decisions they would have to take – was seen as an expected extension of a provider’s duty of care.

Better not best

Just as pension providers and asset managers are challenging themselves to provide more tailored, innovative retirement income solutions, so too the regulator is challenging itself to design a regulatory regime in which success is defined not as ‘the best’ outcome or even a ‘good’ outcome. Recognising the need to deploy targeted support at scale, the FCA rightly proposes that the threshold for delivering targeted support should be that it will deliver a better outcome for consumers than if targeted support was not provided. While, to some, that might seem like a low bar, the reality is that setting a higher hurdle would mean millions of people would continue to miss out on support for their retirement decision-making.

Taking a risk

Whisper it softly, but the regulator should be commended for its overall commitment to a less prescriptive, outcomes-focused framework for targeted support. Few people could confidently claim to anticipate the breadth of innovative approaches that may develop to serve a wide range of consumer needs. While some responses to the consultation will urge the FCA to define key concepts – such as consumer segments and ready-made solutions – in a more granular way, we encourage the regulator to stick to its guns with an outcomes-focused approach.

In with the old, in with the new

Similarly, while the FCA has indicated that the most likely providers of targeted support will be firms that are already authorised – existing life insurers, asset managers and direct-to-consumer platforms – we would also urge the FCA to maintain an open mind regarding digitally-enabled potential new market entrants / app-based propositions, provided they meet the necessary authorisation criteria.

Annuitise me, maybe

When it comes to suggesting ready-made solutions to customers, the regulator is clear: providers of targeted support will have a free hand in their design. The one proposed exception is a restriction on suggesting the purchase of a specific annuity, given annuitizing is an irreversible transaction.  At first blush, this makes sense. Simply purchasing an annuity at the point of first accessing a pension point may not represent an optimal retirement income solution – particularly when there is no scope for second thoughts. However, at a later stage in retirement, say at 75 or 80 years old, the potential downsides of an annuity purchase may be significantly reduced. As such, we recommend the FCA considers loosening the annuity restriction as consumers proceed through their retirement journey.

Better is best

As the FCA policy teams work their way through tens, if not hundreds, of consultation responses, we urge them to stay focused on delivering an outcomes-based approach: give providers flexibility and encourage innovation. Ultimately, the priority must be not regulatory perfection but ensuring that customers at all stages of the pensions journey can be guided towards appropriate solutions. Let ‘better’ be best!