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The Department for Work and Pensions will issue a call for evidence next month about investment pathways in trust-based pensions. Meanwhile, the Financial Conduct Authority is in no rush to introduce a charge cap for pathways.
Investment pathways were introduced by the Financial Conduct Authority for contract-based pensions from February 2021. Since then, larger pension providers have had to offer four decumulation 'pathways’ to unadvised drawdown customers, in an attempt to tackle irrational behaviours and improve outcomes. The pathways must be described in terms of what the consumer is hoping to do, rather than the underlying investments within it, for example, ‘I plan to start taking my money as a long-term income within the next five years’.
‘Little information’ on decumulation products in trusts
The government has been toying with the idea of bringing the pathways concept into trust-based pensions, where more master trusts have started offering drawdown, but it seems views within industry are divided not just on pathways in a trust environment but even in the contract-based space.
MPs recommended that investment pathways should have the same form for contract-based and trust-based schemes, as part of an inquiry into pensions freedoms by the Work and Pensions Committee.
The government, responding on Wednesday to the committee’s report, said that at the moment, there was little information available on the decumulation products providers offer in the trust-based marketplace and “little evidence of engagement with members about the level of support they would want from their pension provider”.
It added that it plans to issue a call for evidence in May, because “until we know more about what is already on offer and the expectations of occupational scheme members it would not be appropriate to simply introduce, into trust-based schemes, similar requirements to investment pathways”.
The DWP said the pathways mandated by the FCA only took effect a little over a year ago, saying it was “important to consider findings from the FCA and industry as to its effectiveness”.
FCA careful not to cross Treasury on charge caps
The Work and Pensions Committee also said it wanted to see a charge cap on pathway products chosen by non-advised consumers, requesting that the FCA should report on this in its upcoming review on investment pathways.
The FCA shied away from committing to a new decumulation charge cap just when its department, the Treasury, has forced through a watering down of the charge cap in accumulation products; performance fees of investment products do now not have to be within the 0.75% accumulation cap. The government has used the concept of value for money to justify this move, which was welcomed by investment firms, saying there had been too much focus on price in the past.
While charges are in the scope of the post-implementation review of investment pathways that the FCA will start this year, it claimed that "after just a year, there will be limits on what can be meaningfully evaluated” because pathway investments were longer term products. “As we have previously stated we want stakeholders to take a holistic view of value for money, having regard to other factors than just investment performance and costs.”
Should there be investment pathways in trust-based pensions?