Pension lifestyle investment strategies – our findings

Following the 2015 pension reforms, we set out our expectation in PS16/12 (Policy Statement on Pension Reforms)[1] that firms should review the appropriateness of lifestyle investment strategies and communicate to customers how their lifestyle strategy relates to their retirement options.

What we did

We contacted life insurers to understand their approach to pension lifestyle investment strategies in light of the pension reforms in 2015 and the resulting changes in consumer behaviour.

This involved telephone conversations and information gathering in Q4 2016 with a sample of 13 firms, accounting for circa 9 million customers in lifestyle investment strategies. The calls were supplemented by other information firms provided.

We assessed firms’ approaches to, and plans for, lifestyle investment strategies based on information provided but did not systematically review the detail of firms’ approaches (eg the asset mix in default funds or the content of all communications).

Why we did this work

Historically, many pension lifestyle investment strategies were designed to target an asset mix immediately before a customer’s nominated retirement date to broadly match the tax-free cash and annuity purchase most customers made.

Following the 2015 pension reforms, with fewer customers choosing to buy annuities, these investment profiles may no longer be appropriate for many customers.

Customers now have a greater number of options in how they choose to access their pension savings.

Our expectations

Our rules and guidance in this area (explained in CP15/30 Pension reforms – proposed changes to our rules and guidance[2]) require ‘sufficient’ information be provided for the customer to be able to make an informed decision.

Relevant rules and guidance include:

• the client’s best interests rule − COBS 2.1.1R
• the fair, clear and not misleading rule − COBS 4.2.1R
• the Responsibilities of Providers and Distributors for the Fair Treatment of Customers (RPPD)

In PS16/12 (Policy Statement on Pension Reforms – feedback on CP15/30)[1], we explained, in line with our rules and guidance, our expectations that firms:

• should continue to actively review their lifestyle investment strategies to ensure they remain appropriate for their customers and their retirement choices
• should remind customers of how their lifestyle investment strategy relates to the retirement options available to them and that, if their retirement needs change, they may need to review their investment strategy

Where changes were being made to lifestyle investment strategies, we gave a non-exhaustive list of considerations:

• the right to make variations under the scheme, including whether any contractual terms are fair under unfair terms legislation
• ongoing and one-off costs to the customer
• the need to model customer outcomes
• the position of customers who have recently received investment advice or who are in the lifestyle de-risking phase and the need to take appropriate action to ensure they are treated fairly
• the customer communication strategy

Key findings

In discussing with firms their approach to, and plans for, lifestyle investment strategies, it was apparent firms use a number of different names for the various books of pension business they operate.

As there was a pattern to when these books of business were written and the approach firms have or are taking to lifestyle investment strategies, we have grouped our findings on this basis.

New business and post-2012 auto-enrolment contracts

We were pleased to note that most firms had reviewed the appropriateness of lifestyle strategies for new business and post-2012 auto-enrolment contracts, had created new default funds and lifestyle glidepaths, and had communicated with relevant customers when migration exercises have taken place.

Existing business likely written pre-2012

Most firms are reviewing, or have plans to review, this business over the course of 2017. We are concerned at the timeliness of these reviews, particularly for customers approaching or having already entered their de-risking phase, and the lack of clear communication to these customers explaining how their lifestyle strategy relates to their retirement options following 2015’s pension reforms.

Many firms are considering migrating customers to new funds with lifestyle investment strategies not targeting an annuity purchase, and firms’ preferred option is to move customers by ‘deemed consent’. Firms typically demonstrated they have undertaken modelling (eg stochastic, actuarial) identifying how different customer outcomes will be impacted. This includes identifying customers near their retirement date, any charges they may incur and whether they may be worse off.

Legacy business likely written pre-2001

We are concerned that firms’ plans for reviewing this business are on a slower track, with reviews typically not planned until late 2017 and into 2018. The same concerns outlined above for customers approaching retirement and the need for clear communication also apply to these older policies.

Bespoke lifestyle arrangements set up by advisers, trustees and employers

Most life insurers view the responsibility to review bespoke lifestyle strategies as sitting with the third parties who set them up. In some instances, life insurers are undertaking proactive modelling of bespoke lifestyling strategies to assess appropriateness for themselves.

Most life insurers have taken, or are planning to take, a proactive approach to communicating with both third parties and consumers about the need to review the appropriateness of bespoke strategies. We are concerned, however, that some firms claim they have little or no responsibility for such strategies and have no plans to proactively communicate with third parties, instead waiting to be contacted by them.

What are we doing

We are following up with firms where we identified concerns and will be inviting firms in the sector to a roundtable event in Q2 2017 to discuss our findings.