Alistair Byrne Head of EMEA Pensions and Retirement Strategy, State Street Global Advisors

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1 9 August 2018 Via electronic submission: Adam Summerfield and Richard Wilson Financial Conduct Authority Dear Sirs, State Street Global Advisors Limited 20 Churchill Place Canary Wharf London E14 5HJ United Kingdom T + 44 (0) F + 44 (0) ssga.com UK Financial Conduct Authority (FCA) consultation on Retirement Outcomes Review: Proposed changes to our rules and guidance State Street Global Advisors welcomes the opportunity to comment on the FCA s consultation Retirement Outcomes Review: Proposed changes to our rules and guidance. State Street Global Advisors is the investment management arm of State Street Corporation. As a firm, State Street has a strong commitment to defined contribution (DC) pensions globally, with over 30 years experience, and 336 billion in global DC assets. Extensive research, focused on consumer outcomes, is the foundation of our DC business. A recent three-part study New Choices, Big Decisions was undertaken by State Street Global Advisors, alongside Ignition House and The People s Pension, to understand consumers decision-making and behaviours, under freedom and choice, with regards to accessing their DC benefits. Insight gained from that study has been used to inform our comments on your consultation. Overall, we endorse the proposals set out in the consultation paper and wish to highlight the following points: DC schemes should help guide consumers through the decision making journey at retirement and simplify the process a process which should be governed by Independent Governance Committees (IGCs) and Trustees. Consumers would benefit from a number of paths of least resistance to point them in the right direction; and to that end we endorse the proposed investment pathways that will create a simplified framework for consumers. We agree with the three proposed pathways, but would suggest one further addition which provides for flexibility in the early stages of retirement as well as income security in later years. Making existing information more impactful, clearer and effective would be beneficial to consumers. Our research shows that standardising industry language and ensuring consumers are directed towards public resources (Pension Wise) would help to improve understanding of the options. Please find below detailed comments on the questions raised in this consultation. Feel free to contact me should you wish to discuss our submission further. Yours sincerely, Alistair Byrne Head of EMEA Pensions and Retirement Strategy, State Street Global Advisors Registered in England: VAT Registration Number: Authorised and regulated by the Financial Conduct Authority.

2 Chapter 3: Protecting Consumers from Poor Outcomes Q1: Do you agree with our current high-level thinking on the key elements of the potential remedy? If not, what would you suggest? Our own research, New Choices, Big Decisions 1, which was carried out in conjunction with Ignition House and The People s Pension, supports many of the proposals set out in the consultation. That research followed eighty year olds for a period of eight months as they made decisions around accessing their DC pension savings. To future-proof our research, we excluded consumers who would have a significant underpin of defined benefit (DB) income as well as buy-to-let landlords, and instead focused on those with DC savings in the range of 30,000 and 100,000. In the last phase of the study, we reverted to the participants of our research one year after they had made their initial decisions and there was unanimous agreement that the new flexibilities have been good for them personally, with the majority pleased with the outcomes of their decisions. These participants also utilised the full range of options available to them, with most choosing to keep their DC savings invested. Our research indicated that disengagement and inertia amongst consumers is a key risk which could be mitigated through guidance and advice, or the provision of a limited number of well-signposted, simple paths that fall into the remit of schemes and providers and are governed by IGCs and Trustees. Respondents were supportive of the idea of being offered default funds into and through retirement. We acknowledge that the idea of an outright default may not be suitable for, and not adequately meet, all objectives in retirement and are therefore supportive of the proposed investment pathways. Our research indicated that consumers desired flexibility in the early stages of retirement, but sought to reduce the risk of running out of money in later years. These aims are not mutually exclusive and we therefore propose the addition of a fourth investment pathway which targets these combined objectives. There is a need to strike a balance between having defaults in place and ensuring that individuals have sufficient information in order for them to make active choices without feeling overwhelmed. In order to facilitate understanding and accessibility, communications should be jargon-free and use language that resonates with the lay person. We are supportive of the proposed standardised choice architecture to assist consumers in their decision-making process. Our research suggested that individuals face risks around lack of understanding of investment trade-offs, demonstrated by the preference for cash-based investments 1 State Street Global Advisors retirement research, New Choices, Big Decision, Part I-III, February 2016-April

3 3 which can lead to poor outcomes for consumers. Lack of knowledge and understanding means that consumers may not fully comprehend the long-term risks, including inflation risk, inherent in a cash-based investment strategy. 2 We are therefore supportive of the proposals that will require consumers to make an active decision to invest in cash, with accompanying risk warnings. Q2: Does the approach we are considering taking adequately capture the objectives of non-advised consumers entering drawdown who might use the investment pathways? If not, what would you suggest? We are supportive of the approach, and this is corroborated by our research which recommended that consumers would benefit from a small number of paths of least resistance. We would, however, suggest the inclusion of a fourth investment pathway. Our research indicated that in the UK, many consumers desire flexibility in the early stages of retirement, but seek to reduce the risk of running out of money in later years. The aims of taking money out flexibly during retirement and wanting an income for life are not mutually exclusive. Our research concluded that a drawdown product, paired with a deferred annuity, would be a successful pathway for consumers. An additional advantage of purchasing the annuity at age 65 is that the participant has made provision for late life income well in advance of the onset of any potential cognitive decline. 3 However, in the absence of deferred annuities, this pathway could also mean setting aside a portion of the pot to purchase an annuity at a later date e.g. age 75 or 80. In New Choices, Big Decisions, pensions were described as a minefield, bewildering and impossible to understand. We would recommend market testing the presentation of the investment pathways with the aim of reducing as much ambiguity as possible. Terms such as income and period of time (long/short) can be interpreted differently by individuals and we would, therefore, also recommend that the use of simple, accessible examples to illustrate the objectives of each investment pathway would be beneficial to consumers. Q3: Do you agree with our suggestion that firms should only offer 1 investment solution in respect of each of the objectives? If not, what would you suggest? Q4: Do you agree with our suggestion that firms should not be permitted to provide a single investment solution to cover all of the objectives? If not, what would you suggest? Whilst we broadly agree that firms should not offer a single investment solution to cover all objectives, we acknowledge that there are instances where a single investment solution might appropriately cover a number of objectives. We therefore do not believe 2 Pensions Policy Institute, Supporting DC members with defaults and choices up to, into, and through retirement January Laibson, Harvard University, Behavioral Finance: Psychological Barriers to Optimal Investing, 2014 Presentation 3

4 that this needs to be explicitly regulated if there are suitability requirements that providers are required to meet, as well as sufficient oversight and governance by IGCs. Q5: Do you think that firms should offer investment solutions for all pathways? If not, what would you suggest? If a firm does not offer an investment solution for a particular investment pathway, should it be required to enter into an arrangement with another firm to provide it? While we agree that there should be a consistent presentation framework in place to make decision making as easy and frictionless as possible so that consumers are not overcome with inertia or overwhelmed with information, we are not supportive of a specific requirement to signpost to another firm. A balance should be struck between the benefits to the consumer and the due diligence requirements that firms would face in recommending another provider, which may be disproportionate to the consumer benefit. Q6: Do you agree with the approach we are considering taking on prescription around investment solution and risk profile of investment pathways? If not, what would you suggest? Firms should develop strategies based on the objectives of the investment pathway and target market and these should adhere to defined suitability criteria. Prescription may have the unintended consequence of reducing innovation. Q7: Do you agree with the approach we are considering taking on permitting firms to use pre-existing investment solutions to offer an investment pathway? If not, what would you suggest? We agree, if the investment solution meets the objectives of, and is suitable for, the investment pathway. Q8: Do you agree with the approach we are considering taking on allowing firms to offer investment solutions other than investment pathways? If not, what would you suggest? We agree, particularly for advised or sophisticated clients. Q9: Do you agree with the approach we are considering taking for the choice architecture to be implemented by firms? If not, what would you suggest? Our research indicated that consumers would benefit from less information, but information that has been tailored to what they are interested in rather than a one size fits all explanation of all of the options. Consumers will benefit from making existing information more impactful and effective, with a few defined paths of least resistance. Industry information and language should be standardised and consistent across all firms. Industry standards should therefore be set by a central body as opposed to being created individually by firms as this not only adds to confusion regarding choices but also makes comparison between firms more difficult. This was indicated by responses provided by participants in our joint New Choices, Big Decisions research: 4

5 5 I ed my provider over the weekend as they did not appear to offer a facility to withdraw random amounts of cash sure enough it was on the website, but under the title Flexible Transitions Account. I had dismissed this as most of the 20 page document spoke about setting up a pension under that title. It was not clear (to me) that it was applicable to my circumstances. Perhaps I m being thick here [61 year old female] What you can do, the drawdowns, apparently there s three types of drawdown now! I only thought there was one. There s a deferred drawdown, there s a drawdown which you take and you get for life so it s an annuity, but there s another one and I m trying to work out what that one is. Apparently there s three. Whether that s true or not, I don t know. So that s my last assignment to find out, because it s kind of important. All my money. If I make a mistake now, that s it. [64 year old male] We agree that there should be a backstop strategy other than cash, which could be the default that the member was in during the accumulation phase. We would also suggest that included within the choice architecture is the option to consider the question of multiple pots, one of which could be to combine pots as this can provide cost benefits to the consumer. Q10: Do you agree that investment pathways should be made available to advised consumers? If not, what would you suggest? Q11: Do you agree with the approach we are considering taking on how we should define advised consumers for the purposes of the application of our rules on investment pathways? If not, what would you suggest? Q12: Do you agree with the approach we are considering taking in relation to circumstances where consumers are designating funds to drawdown on multiple occasions? If not, what would you suggest? Life circumstances can vary between drawdown decisions. For example, five respondents in our study found that their urgent need for the money had gone away (typically they had been made redundant, but had subsequently found a new job). It would therefore benefit consumers to engage with the investment selection process at each drawdown to ensure that the investment strategy is suited to their current (and future) circumstances. Q13: Do you agree with the approach we are considering taking to require firm review of investment pathways on an annual basis? If not, what would you suggest? 5

6 Q14: Do you agree with the approach we are considering taking for ongoing disclosure to consumers about investment pathways? If not, what would you suggest? Our research indicated that consumers lacked a full understanding of the options available to them. Periodically making them aware of alternatives to their chosen pathway may assist in decision making and awareness of their options, which could lead to better outcomes. We would, however, emphasise a balance in the tone of the communication such that it does not create a bias to action. Q23: Do you agree that the IGC regime should be extended to investment pathways? If not, what alternative regime would you propose? The extension of the role of IGC s to decumulation products, and continued oversight of investment pathways, will ensure that the objectives of the pathway are aligned with the need of members, which will lead to better outcomes. Moreover, the establishment of investment pathways coupled with IGC s extended remit should mitigate the need for a charge cap, but we suggest that a value for money requirement, in order to justify costs, should be included in the mandate of the IGCs. A charge cap could have unintended consequences such as reduced choices for consumers or limitations around innovative solutions, but the framework should be designed to provide consumer protection. Q24: Do you consider that a requirement for independent oversight should apply to other decumulation products (i.e. not investment pathways)? If so, why? We are neutral on this point. Whilst we agree that having independent oversight generally leads to better outcomes, this can increase costs to providers, potentially offsetting the benefits. Q25: Do you think we should carve out from the requirement those providers which only provide decumulation products for advised consumers, or those in less need of protection? How would this work? We are neutral on this point. However, investment pathways may provide a lower cost alternative to bespoke strategies provided by advisors and could be potentially offered to advised consumers. Q26: Do you have any other issues or concerns about the proposals? Simpler choices for non-advised consumers will reduce the scope for harm. While there may be unintended consequences that arise from the proposed framework, it is likely that the benefit to consumers will be greater than the harm (i.e. reduction in competition and choice). Q27: Do you agree with our current thinking that a single, default investment pathway is unlikely to be suitable in drawdown? If not, please provide reasons why you disagree. We broadly agree that a single investment pathway may not adequately meet all objectives in drawdown, but acknowledge that there are circumstances where a single investment pathway is suitable for consumers across multiple objectives. An example of such a solution would be a drawdown product paired with a deferred annuity, which 6

7 7 would meet the objectives of flexibility in the early stages of retirement, as well as income security for life in later years. Q28: Do you agree with the approach we are considering taking to require making investment wholly or predominantly in cash an active choice? If not, what would you suggest? Our research indicated that a tendency toward cash-based investments stemmed from inter alia lack of trust in pensions (media reported scandals) and the desire to exercise more control over savings. There was a distinct lack of understanding regarding how investment choices and rates of return impact how long pensions will last (including a lack of understanding of inflation risk); we observed that explanations which assisted in understanding how quickly money would run if entirely invested in safe assets, and how that interacted with longevity risk, was an important eye opener for consumers. Q29: Do you agree with the approach we are considering taking in relation to mandating warnings to those making an active choice to invest in cash? If not, what would you suggest? We agree as per the above. Q31: Do you think that we should require firms to issue warning to consumers who are invested in cash on an ongoing basis? If not, what would you suggest? Chapter 4: Improving Consumer Engagement with Retirement Income Decisions: Wake-Up Packs, Retirement Risk Warnings and Reminders Q34: Do you agree with our proposals on Wake-Up packs? If not, how should we change them? We agree with the broad concept of Wake-Up packs, however, we would suggest revising the term Wake-Up pack as this language reinforces the idea that action is required. In our study, New Choices, Big Decisions, many of the younger respondents felt under pressure to do something with their pension, or risk missing out. This was attributed to, inter alia, information in provider packs wherein people recalled reading about the options available to them, but did not tend to recall being told that they had the option to leave their pension alone. It typically took a personal intervention (discussions with providers, meeting with Pension Wise or a review with an advisor) to make them stop and really think about whether they needed to access their pension at that particular point in their life. Until I had the conversation with the guy from AVIVA, I think that was the first time anyone had said to me that I don t have to do anything with it if I didn t want to. We were all caught up in it all. [54 year old female] Packs should therefore reinforce the option to do nothing and stay invested in order to grow assets for later life. 7

8 Chapter 5: Improving Consumer Engagement with Retirement Income Decisions: Annuity Information Prompt Q38: Do you agree with our proposal to require firms to ask consumers questions that will help a consumer determine whether he or she is entitled to an enhanced annuity. Q39: Do you agree with our proposal to require that firms include information about the consumer s potential eligibility for an enhanced annuity in the quote for comparison? Chapter 6: Promoting Competition by Making Costs of Drawdown Products Clearer and Comparisons Easier Q45: Do you agree that firms should provide regular client communications for those who have withdrawn tax free cash but not taken and income? We agree with the provision of regular client communications, however, and as per our comments in response to Question 34 above, the communication should not create a bias to action. 8