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Fitch Ratings: UK Life Insurers May be Pushed to Cut Drawdown Charges.

London: The most significant implication for UK life insurers from the Financial Conduct Authority's (FCA) Retirement Outcomes Review is the prospect of pressure to reduce charges on drawdown products, Fitch Ratings says.

The FCA plans to examine the charges on standard drawdown products and is highly likely to move towards capping them if it finds they are excessive, according to its final report on the review, published in June 2018. It added that firms should use an annual fund charge of 0.75% as a point of reference, but found that charges for customers who did not take regulated advice were sometimes as high as 1.6%. The 0.75% reference point matches the cap on charges for pension auto-enrolment default selection funds, which the FCA introduced in 2015.

Pressure to reduce customer charges 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. 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 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. 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.

The FCA's report also focused on investment choices in drawdown products, and found that many consumers who do not take advice "end up in investments that may not be right for them, including cash". The FCA outlined a proposal for insurers to offer a simple range of 'investment pathways' to help customers select investments to meet their objectives.

We think complex products 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. Poor investment returns or increasing lifespans could cause drawdown funds to run short, leading to widespread customer dissatisfaction across a potentially significant part of the retired population. 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.

The Retirement Outcomes Review began in June 2016 and concluded with the recent publication of the FCA's final report and accompanying proposals in a consultation paper, CP18/17. Following the consultation period, which ends on 6 September, the FCA expects to publish new rules and further proposals in January 2019.
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Publication:Daily the Pak Banker (Lahore, Pakistan)
Geographic Code:4EUUK
Date:Nov 12, 2018
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