The regulator’s messaging around pension funds and cash is capricious. Everyone needs to invest, so why not help them do it?
- Warning letters will be issued for those with more than 25% in cash in their pension funds
- The regulator shows no sign of toning down its risk warnings on financial market investment
- The overall message is confusing and may leave investors paralysed with indecision
New regulations come into force on 1 December requiring pension providers to send a warning letter to investors with too much cash in their pension funds. Having spent much of the past decade insisting that advisers, fund providers and anyone else involved in the selling and marketing of investments slap risk warnings on anything that gives the slightest hint that the stock market may be a good place to put capital, this seems a surprising turnaround.
The rules apply to advised and non-advised investors more than five years away from their normal pension age. They must have had 25% or more in cash or cash-like investments for more than six months. If cash remains high, another letter will need to be sent around 12 months later. The warning letters will need to include an illustration of the effects of inflation on their retirement savings. They do not apply where a discretionary fund manager has been appointed.
The message from the regulator is capricious: stock markets are incredibly risky and you could lose all your money, but cash will see your savings ravaged by inflation. Is there a magic option somewhere between investment and cash that will protect an investor against inflation, but also come without volatility? Perhaps crypto or spread-betting, which appear to attract none of these warnings?
Of course, the regulator isn’t wrong: stock markets are volatile, and keeping money in cash is an inflation risk, but the risk is that the regulator only focuses on the stick rather than providing any carrot. This leaves investors bewildered and, increasingly, paralysed on where to put their capital.
Given that people need to invest to grow their capital, to support the UK economy, and to help businesses grow, wouldn’t a more useful message be to focus on holding a balanced portfolio, and investing for the long-term? Emphasising these factors would surely be more productive than blindly focusing on the risks. It is tempting to put this initiative in the same bucket as the obtuse ruling on cost disclosure for investment trusts – where ideology has won out over practicality.
The regulator should be helping investors to invest safely rather than chucking out blanket warnings that obscure more than they enlighten. In the meantime, advisers will need to be ready to manage clients’ understandable confusion if they receive these warnings from their pension providers.