Reflecting on investment pathways: 12 months on

In our blog last year, we reflected on the first 18 months of Investment Pathways for drawdown and the areas where things could change to improve outcomes for non-advised consumers further.

Now, with over two years of experience to draw upon, the Financial Conduct Authority (FCA) published their post-implementation review on 11 July 2023, focussing on rationale and take-up, communications and asset allocations and how these could impact consumer outcomes. Overall, they believe that Pathways is working as intended - to help people who aren’t receiving advice to address some of the risks of harm that were identified in the Retirement Outcomes Review. However, the FCA recognise that there is more that can be done to support consumer understanding and decision-making. They also warned that value for money is a key risk for consumers accessing their pension pots at retirement, and although they are broadly comfortable with the charges being made, they acknowledged that some firms were charging above the recommended 0.75%.

From our interactions with providers, we have gained insights into providers own views on Investment Pathways since it was launched.

In general, it seems that providers are feeling comfortable with having embedded Pathways into their non-advised customer journeys and there is positivity towards how it is going. Recognising of course that it is still too soon to understand how much of an impact it will ultimately have on outcomes for non-advised retirees.

The nature of different providers business models also means that Pathways has been implemented in slightly different ways across the market, and this has had an impact on the take-up rates of the different Pathways options across various firms. This point was also noted in the FCA’s review.

A key theme which we mentioned in our blog last year was engagement and it feels that this continues to be an area that requires further improvement. From our work with providers, we know that they use a range of methods of communication to inform their customers of Pathway options, with most being largely digital based communication tools, however these tend to be fairly generic. Personalised communications could be developed to be more relevant and add value to an individual’s journey, for example, by providing the ability to show personalised fund projections for each Pathways solution.

We are still hearing that customers are generally uncomfortable making financial decisions, which is often leading to member inertia – meaning customers remain in their existing investments regardless of whether they are suitable. This is understandable given Investment Pathways is still a relatively new concept, so it may be that more work is needed to be done to educate consumers on Investment Pathways to encourage uptake, as indicated by the FCA’s review.

The introduction of the FCA’s Consumer Duty, which is to be implemented for new and existing business by 31 July this year (and by July 2024 for legacy business), means that firms who offer Pathways have additional challenges relating to compliance with the new Duty. For example, under the products and services outcome firms must ensure that products are designed to meet the needs, characteristics and objectives of its target customers. Additionally, the consumer understanding outcome requires firms provide customers with timely information that allows them to make informed financial decisions, which is seen to be one of the key challenges amongst providers – helping consumers understand their investment choices. While many firms already set target markets under PROD, it is important that firms continue to engage with customers to help them understand their Pathways options in the early stages of retirement to help them decide whether Pathways meets their needs before investing. In overcoming this challenge, firms have talked about the materials they’ve created, or are looking to create in the future, to better educate customers which included product guides as well as more interactive options such as webinars and videos.

Overall, we are seeing that firms are continuing to develop their Investment Pathways solutions through providing clearer information to their customers, although more could be done. The more firms can continue to better inform and guide those entering retirement, the better the expected outcomes for non-advised customers.

On the same day as the FCA issued their Pathways review, there were another couple of related consultations, one of which came from the Department of Work and Pensions (DWP) looking at how to help savers understand their pension choices. Pathways and other types of default are being considered for workplace schemes and, as a general point, the consultation considers ways for trust-based schemes to learn from retail in implementing retirement solutions for their members.

The other consultation was on Value for Money and was issued jointly from the FCA, the DWP and the Pensions Regulator and it is encouraging to see this more joined-up approach to improving outcomes for pension savers. 

This blog is based upon our understanding of events as at 27 July 2023. It is a general summary of topical matters and should not be regarded as financial advice. It should not be considered a substitute for professional advice on specific circumstances and objectives. Where this blog refers to legal matters please note that Hymans Robertson LLP is not qualified to provide legal opinion and therefore you may wish to obtain independent legal advice to consider any relevant law and/or regulation.

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