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9 April 2021

With great power comes great responsibility. Consumers now have a host of choices when it comes to making their pension money last, but are they really equipped to make an informed decision?

How does a lay person grapple with the idea of investment risk? Should they engage a financial adviser when they might feel it is cost prohibitive, not appropriate or too daunting? How do they avoid falling into the clutches of ever more sophisticated scammers?

The FCA launched its Retirement Outcomes Review (ROR) in 2016 to check how the market was developing and address any signs of consumer harm. It focused on those who choose to drawdown pension savings without taking regulated advice and found many were losing out on retirement income because their pension pots were invested in cash, even though they didn’t intend to spend it in the short term.

The introduction of investment pathways

As a result of the ROR, two consultations were issued. Firstly, CP18/17, which proposed a remedy package including better communications, support and guidance and wake-up packs – improved advice at the point drawdown is entered or an annuity is purchased.

This consultation also introduced the concept of investment pathways, or in other words, ready-made investment solutions, such as multi-asset funds, that a provider believes meets one of four standardised objectives. These are intended to correspond to the way a consumer might wish to use their drawdown pot, help them consider their retirement plans and come to a decision.

The four objectives are:

  1. I have no plans to touch my money in the next five years
  2. I plan to use my money to set up a guaranteed income (annuity) within the next five years
  3. I plan to start taking my money as long-term income in the next five years
  4. I plan to take out all of my money within the next five years.

The second consultation, CP19/5 focused specifically on these pathways, along with ensuring costs and charges are clear. The final rules were set out in PS19/21 and investment pathways came into effect on February 1 this year.

Although the ROR primarily addressed non-advised consumers, the FCA also made changes that affect financial professionals. Specifically, advisers now need to consider retirement pathways when assessing the suitability of an investment for clients contemplating drawdown.

What should advisers be doing?

Investment pathways have changed the retirement arena radically, so it is important to be up to speed on the new regulations by reviewing available literature and ensuring awareness.

New guidance has been inserted into the COBS Sourcebook in section 9.3.3A(1) and this needs highlighting in all internal procedure documents. It states (with caveats): “When a firm is making a personal recommendation to a retail client about the investment of funds in the client’s capped drawdown pension fund or flexi-access drawdown pension fund, its suitability assessment under COBS 9.2.1R(1)(a) should include consideration of pathway investments.”

The FCA expects advisers to demonstrate that pathways have been taken into account when recommending a provider, so build this into your processes. Be sure to consider costs and charges, plus the benefits of ongoing service.

We would also recommend you review suitability letters and address pathways. For example, incorporate wording to the effect that you have considered the investment pathway as an alternative to providing a full advice service, but that the client has agreed they wish to rely on the firm’s advice and research, expanding as appropriate.

The FCA is often criticised for not being clear about what it is seeking. However, the introduction of pathways and the recent DB papers from the regulator are an indication that it is taking this feedback onboard and is prepared to provide specific guidance for firms to follow.

For more information about meeting the adviser obligations in relation to investment pathways, don’t hesitate to contact B-Compliant on (0161) 521 8641 or email:

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