New investment pathways rules: a step in the right direction?

3 min read 8 Feb 21

The information contained in this page is for professional Financial Adviser use only.

The new rules outlined in the FCA’s Retirement Options 2019 review were just one set of regulations knocked off course by the coronavirus pandemic, with implementation delayed until 1 February 2021.

So here we are in February and the rules have now been introduced but if you’re like me, anything first talked about ‘before covid’ feels like a long, long, time ago indeed. So I’ll start with a quick recap of what the new rules cover and, crucially, why this matters for you as an adviser.

The most important point to mention before anything else is that the rules revolve around the introduction of four investment pathways to support customers who are entering drawdown without taking advice (before you stop reading altogether, I’ll highlight in just a moment why they are still very much relevant for advisers).

The purpose of these pathways is to help people entering drawdown make better decisions about how they invest their drawdown funds and achieve better outcomes as a result. Within this, there is also the specific objective of ensuring that consumers entering drawdown only invest mainly in cash if they take an active decision to do so. And finally, there is a requirement for firms to send annual information on all the costs and charges paid over the previous year to consumers who have accessed their pension.

Attention advisers

The investment pathways are mandatory for all non-advised customers seeking to access drawdown but it’s important for advisers to bear in mind that the existence of an ongoing advice charge on the pension won’t necessarily exclude a client from the new regulations. If no personal recommendation has been provided, then a pension provider will be required to offer investment pathways and take clients through a choice architecture to select investments.

The main takeaway for advisers is a seemingly simple, but no less important one: keep speaking to your clients, ensuring they get advice from you and don’t go direct to the provider.

The Investment Pathways rules have also introduced a new piece of guidance into the adviser COBS handbook. COBS 9.3.3A says, “when a firm is making a personal recommendation….about the client’s capped drawdown pension fund or flexi-access pension fund, the suitability assessment should include consideration of pathway investments”. As with the above, this guidance is probably not something that will alarm too many advisers but it’s certainly worth following, if for no other reason than by considering the pathway investments that the current provider will be suggesting, you might decide these represent the best solution for your clients to adopt.

The bigger question of course is whether the investment pathways will be a success? Advised drawdown will no doubt still deliver better outcomes but, without getting into the well-worn arguments about the affordability and access to advice, for non-advised investors the pathways should hopefully be better than nothing at all.

I could of course get into whether reducing pension decisions down to just four options drastically underestimates the complexity of retirement, or whether the pathways will ultimately benefit providers more than consumers. But instead, I’ll wrap things up on a positive note leaving you with some more optimistic results from recent research of over 1,100 non-advised consumers[1], where 60% of respondents were positive about the investment pathways, particularly amongst the so-called Generation X age group. Nine in 10 of those surveyed also said they found an investment pathway option that met their particular needs.

What are the investment pathways?

Here are the four options, or pathways, that non-advised investors will be presented with by providers. In the same consumer research mentioned earlier in this article, income drawdown emerged as the most popular pathway:

I have no plans to touch my money in the next 5 years.

I have no plans to touch my money in the next 5 years.

I plan to start taking my money as a long-term income within the next 5 years.

I plan to start take all my money within the next 5 years.

Missed Mike’s January regulatory round up? take a look – RDR and FAMR review.