According to the new proposals from the regulator, private pension providers should be obliged to send inflation warnings to customers who hold large amounts of cash in their funds.
In a move aimed at the fast-growing personal retirement market, the Financial Conduct Authority (FCA) is forcing providers to do more to help unprepared clients make better investment decisions.
Approximately 125,000 people who do not have an advisor start an off-company pension each year. These systems mainly include private pensions and self-created private pensions.
They are often used by the self-employed without access to a company pension scheme as well as by consumers who want to top up their company pension scheme or consolidate existing pension funds.
The FCA said, however, that individuals who retire outside of the workplace (NWPs) without the help of an advisor find it difficult to “identify appropriate investments or keep large amounts of their retirement pot in cash”.
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The proposal published on Thursday stipulates that both providers of individual and self-invested private pensions are obliged to warn consumers who have invested more than 25 percent of their private retirement assets in cash for more than six months.
“Our cash alert proposals are designed to warn consumers who have invested in cash that inflation could undermine their retirement savings. We want to encourage these consumers to invest in growth wealth, as the cumulative effect of investing money at retirement age can mean a much smaller pension pot, ”said the FCA in its consultation on the proposals.
In addition, companies will be required to offer customers who open a personal pension account ready-made, standardized investment solutions.
“As the market for non-job-related pensions evolved, the range of investments available for inclusion in an NWP has broadened,” said the FCA.
“Consumers who have not been advised who buy an NWP often have little investment know-how and may not find it easy to grapple with the selection and complexity of the investments.”
The share of advice-free sales in the external pension market rose from an average of 8 percent between 1988 and 2012 to 35 percent in 2019
The proposed changes bring private retirement planning closer to corporate plan rules, which currently force savers into a pre-built investment strategy with fee controls and strict oversight by independent governors.
However, the FCA chose not to extend the same fee and governance protections to non-work-related pensions.
Mick McAteer, a former FCA board member, tweeted, “Why? [the] different treatment of people who save in the workplace. . . and those who do not save by the job? Why do they deserve less protection? ”
The FCA’s intervention stems from the fact that the share of non-advised sales in the bond market outside of the workplace rose from an average of 8 percent between 1988 and 2012 to 35 percent in 2019, up to 50 percent in a wide range of funds and being sold to the mass market of the new sales were not advised, the FCA said.
Becky O’Connor, Head of Pensions and Savings at Interactive Investor, a DIY investment platform, said, “It’s really important that investors who want to do it themselves can do so, while those who need help have access to it . even.”
She added that Sipp investors generally don’t “hoard cash” with Interactive Investor.
The FCA plans to respond to its consultation in February next year.