“Almost every policy will have unforeseen consequences. No one has a crystal ball to predict how things will pan out. But the extent of those consequences vary and pension freedoms has seen a tsunami of challenges for the retirement market, which the regulator is still trying to tackle five years later. It has set out a package of remedies that it hopes will manage the myriad of challenges of a policy that was introduced at what seems supersonic speed in the context of policymaking.
“Disengagement is one of the most substantial challenges as a third of non-advised drawdown customers are invested entirely in cash. And this is the rationale at the heart of their suggestion to create investment pathways.
“Indeed, even for those who are engaged, there is a substantial risk attached with DIY investing. Research from Quilter and Boring Money shows that unadvised investors have seven bad habits including exposure to equity investment, a bias towards the UK, lack of asset allocating, not rebalancing and panic selling. These and other mistakes mean DIY investors miss out on 11.3% of potential gains a year. A substantial problem during the accumulation period but devastating when it comes to drawdown.
“So the logic behind pathways is hard to argue with. They encourage people into an investment that is created broadly designed around them and with their needs in mind. However, we cannot ignore the risks that go along with it and must not forget that for many advice will continue to be key as it will ensure an investment plan that is specifically tailored around them.
“A central issue with pathways is that it may become the path of least resistance and people go for a default instead of engaging. The regulator needs to carefully observe consumer behavior and we need to ensure we quash any public misconception that it doesn’t require the customer’s ongoing input.”