The Financial Conduct Authority (FCA) has published the findings of its retirement outcomes review and is running a consultation until September 06 on its proposed remedy package… and Fitch Ratings has reacted to share what it sees as the most significant implication for life insurers in the UK.
“The FCA found that competition in the drawdown market appears weak, with nearly 94% of non-advised customers accepting the drawdown option offered by their own pension provider, compared with only 35% of advised customers,” noted the credit rating agency. “In theory, greater regulatory and customer focus on charges should make the market more competitive, and could work to the advantage of larger providers that can price more competitively due to economies of scale.
“In practice, however, a competitive market may prove difficult to achieve. We do not expect drawdown to become a commoditised product. Its complex features – notably choice of investment, timing of withdrawals, and charging structure – make it difficult for customers to compare products on price alone, and even the simplest versions are likely to differ between providers.”
In Fitch Ratings’ view, the prospect of pressure to reduce charges on drawdown products is highest on the list of major implications. It said such pressure is credit negative for the UK life sector.
“This is not a new theme and is factored into our rating analysis and overall view of the sector,” explained Fitch Ratings. “A reduction in charges on drawdown products would have a limited impact on the sector's overall profitability in the near term, as drawdown still represents only a small part of insurers’ balance sheets.
“The product only started to become popular in 2015, when pension freedoms were introduced. A third of pension pots accessed for drawdown since then were accessed without advice, compared with only 5% previously.”
The credit rating agency added that it believes complex offerings such as drawdown “inevitably carry reputational risk for the life insurance sector, even if insurers simply offer guidance rather than formal advice and are fully compliant with conduct regulation at the point of sale.” It also cited poor investment returns and increasing lifespans as potential causes of drawdown funds running short, which would negatively impact customer satisfaction.
“This could lead to reputational damage for the life insurance sector or even mis-selling claims against insurers if regulatory scrutiny or standards are tightened retroactively,” said Fitch Ratings.
