The Financial Conduct Authority (FCA) has launched a consultation on proposals for firms offering personal pensions to offer a default investment option to help non-workplace pension customers that have not received advice save for retirement

The consultation, which closes on 18 February, is seeking views on proposals that would require the default option to be an appropriately diversified basket of investments, and take account of climate change and other environmental, social and governance risks.

These investments would then be changed as a customer approaches retirement to lessen the impact of any market downturns on their savings.

It argued that a professionally designed investment strategy could deliver "substantially better outcomes" for those motivated enough to know that they need a pension, but who lack the experience or time to choose the right mix of investments.

In addition to this, non-workplace pension providers would be required to warn customers holding high levels of cash that they are at risk of having their savings eroded by inflation, and prompt them to consider investing on other assets with the potential for growth.

The proposals were prompted by concerns that the current complexity in the system can make it hard for some consumers who do not take advice to choose investments that meet their retirement needs, and could end up with investments that are not appropriately diversified.

Indeed, the FCA previously published a discussion paper in 2018 to seek to understand how well the non-workplace pensions market was working, with a feedback statement in 2019 revealing a lack of competitive pressure driven by low customer engagement.

In light of this, the FCA clarified that whilst the proposed intervention is intended to protect non-advised consumers, it may also promote competition by focusing on a single type of investment solution.

"While we do not expect all non-advised consumers to be in a position to judge whether a particular default option is well designed and offers good value, market commentary and press coverage, combined with our related workstream of clearer benchmarking of value for money, could mean that some firms become known for a good default option," it said.

However, the FCA also warned that if it finds that default options are poorly designed and do not deliver value for money, it could consider further measures, such as the case for a charge cap or an extension of the remit of independent governance committees' to default options.

Commenting on the proposals, FCA executive director for markets, Sarah Pritchard, said: “People spend decades working hard to build up a pension to support them in retirement, and we want their savings to work just as hard for them.

“These proposals will ensure that customers who don’t take financial advice can benefit from a professionally designed investment strategy, and reduce the risk of their retirement income being eroded by inflation.

“The proposals form part our wider work on pensions which is designed to ensure that customers are better supported throughout their pension journey.”

Subject to consultation feedback, the FCA is expected to publish a final policy statement and final handbook rules on the proposals in 2022.

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