Regulator unveils plans for non-workplace pensions ‘default’ funds
Currently non-workplace pension customers have to choose their own investments from an increasingly wide range of options. This complexity can make it hard for some customers who don’t take advice to choose investments that meet their retirement needs.
Under the proposals, the default option would need to be an appropriately diversified basket of investments and take account of climate change and other environmental, social and governance risks. As a customer approaches retirement, their investments would be changed to lessen the impact of any market downturn on their savings.
The plans also suggest that non-workplace pension providers should also warn customers holding high levels of cash and prompt them to consider investing in other assets with the potential for growth. The aim is to ensure pension savers have as big a pension pot as possible at retirement.
Tom Selby, head of retirement policy at AJ Bell, said: “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.
“Care will need to be taken in ensuring engaged customers who were planning to build a retirement portfolio based on their circumstances are not encouraged to instead simply go for the ‘easy option’ of investing everything in a single default fund that might be less appropriate.”
The FCA consultation on non-workplace pensions will run until 18 February 2022.