It seems to be universally accepted that the announcement of the pension freedoms caught most regulators on the hop, with the FCA worst affected.
Perhaps less widely accepted is the view that the lack of consultation and tight timeframe between the freedoms’ announcement and the go-live date meant that those same regulators were forced to play catch-up.
It must be challenging to regulate for a policy described at the time as the most significant change to pensions in 100 years when there is no real consultation and minimal analysis looking at how retirees might behave, and so how to regulate those behaviours.
The FCA were able to make a number of changes to the at retirement regulatory requirements in the time before the freedoms launched – we saw the requirement to ask customers risk questions and provide tailored risk warnings depending on the answers given. Providers were also required to signpost non-advised clients to the Pension Wise service. However, neither of these changes could be described as radical when set against this ‘once in a century’ change to the retirement framework.
Since the freedoms were introduced and these requirements went live the FCA has spent a considerable amount of time gathering data about what retirees have actually been doing with the freedoms. It has also been working on a wide-ranging market study – the Retirement Outcomes Review – and is due to publish its final report covering this review in the first half of 2018.
An issue that the FCA faces, although the extent to which it intends to deal with this in the Retirement Outcomes Review is not clear, is that the author(s) of its own rulebook wrote those rules with a very different retirement framework in mind. The rules were, and largely still are, written with a view to protecting individuals who were faced with a one-and-done decision about how to take benefits. So just before a saver is expected to retire they must be sent information encouraging them to shop around, with an annuity expected to be the home for their retirement funds. Once that annuity has been purchased, no further communication is assumed to be required, so there is no regulatory requirement for that communication.
If the drawdown regulation wasn’t an afterthought, it certainly looks like it was. Providers are given the very high-level requirement to send drawdown customers sufficient information to allow them to review their decision to go into drawdown.
Going forwards, the FCA needs to create a regulatory retirement framework – in my view from scratch – which starts from the position that drawdown (and our friend, the UFPLS) are mainstream options, and which caters for the fact that this means retirement is not a one-and-done decision any longer. The system will never work as effectively as it must if it is built on annuity-focussed, single event foundations, with drawdown simply an afterthought.
Regulations need to deal with the wide range of choices now open to customers regarding the date at which they can access benefits, how they choose to access those benefits at that point in time, and what they then choose to do with them after the point of access.
For huge numbers of savers retirement planning is now a journey that begins a number of years before access is even available and may continue for 30 to 40 years thereafter.
Rules built with a primary aim of helping people to choose an annuity when they reach 65 won’t do it any more.
What this boil down to is the need for the outputs of the Retirement Outcomes Review to reflect that this policy is the most radical change in retirement for 100 years. The regulatory change needs to reflect this by taking things back to the brickwork, if not the foundations. Sticking a fresh coat of paint or some new wallpaper on the walls to cover the regulatory cracks just won’t do it.