One size fits all ‘default’ pension funds could be offered to people saving outside workplace schemes
People saving for retirement outside workplace schemes, like the self-employed, could be offered simple new ‘default’ pension funds.
Pension firms would have to offer anyone who has not paid for financial advice a ‘standardised’ investment fund alongside other options – but charges would not be capped at 0.75 per cent as they are in similar work funds.
Under the proposals by the Financial Conduct Authority, firms would also have to issue alerts to customers holding high levels of cash and suggest investing in assets with better growth potential.
Retirement plan: Pension savers making their own arrangements have to choose investments from an increasingly wide range of options
People with jobs are automatically opted into their employer’s pension scheme unless they actively object, and their money is placed in its ‘default’ or standard investment fund and stays there if they don’t choose any of the alternatives usually available.
The vast majority, around 90-95 per cent, stick with their employer’s default fund, whether it really suits them or not.
But the FCA says that those making their own individual arrangements have to choose investments from an increasingly wide range of options.
This can make it hard for some customers who do not take financial advice to select the investments that will meet their retirement needs, it believes.
The FCA said the non-workplace pension market is large, with around 13million accounts and accumulated pension savings of around £470billion.
Such schemes are used by self-employed people without access to a workplace pension, as well as by customers wanting to supplement their workplace pension savings or consolidate existing pension pots.
Under the proposals, the default option would need to take account of climate change and other environmental and social risks. Investments would also need to be ‘appropriately diversified’.
The FCA says it considered a charge cap on new default funds to mirror the 0.75 per cent one used by employer schemes, but decided to ‘pause’ the move at this time.
‘We expect providers to consider their obligations under our product governance rules and under our proposed consumer duty,’ it says.
The proposals come as the inflation rate is running at a near-decade high at 4.2 per cent, eroding the value of many people’s savings as living costs such as energy, fuel and food increase.
It is thought inflation could potentially peak at 5 per cent next spring.
Tom Selby, head of retirement policy at AJ Bell, says: ‘With inflation threatening to rampage through the economy, ensuring savers with a long-term time horizon invest their money sensibly is hugely important.
‘While people who choose to invest in a non-workplace pension have by definition exhibited a level of engagement, there is a risk that some will either subsequently become disengaged or struggle to make good choices about where to invest their hard-earned retirement pot.
‘In a worst-case scenario, they will end up shoving all their pension in cash and risk their money being eaten away by inflation.
‘Having a default fund which is broadly suitable while also issuing warnings to those who invest in cash over long time periods could therefore help improve outcomes.’
Becky O’Connor, head of pensions and savings at Interactive Investor, said: ‘It’s really important that investors who want to do it themselves feel free to do so, while those that need a helping hand can access this, too.
‘It is true that there is a huge choice of funds, trusts, ETFs and direct equities out there for those who want to make their own choices. Investors can also face choices between different asset classes, geographies and themes.
‘On the risk of cash, generally speaking, Self-Invested Personal Pension investors do not hoard cash.
‘They hold a slightly higher proportion than Isa and trading account customers on interactive investor. They can hold cash for a variety of reasons, for example, taking opportunities in the market.’