The Financial Conduct Authority has proposed that firms offer a default investment option to non-workplace pension clients.

Workplace pension schemes, such as auto-enrolment plans, already have to offer a default fund but non-workplace pensions do not.

Canada Life estimate the non-workplace market to be worth around £470bn covering 13m accounts.

The new proposals could apply to any non-workplace, standalone pensions such as SIPPs, personal pensions and stakeholder pensions.

The initiative is particularly aimed at non-advised pensions where individual pension savers have to make their own investment decisions. There are concerns that some non-advised pension savers are keeping money in cash for long periods of choosing unsuitable funds.

The FCA said mandating the offering of a default investment options would help non-workplace pension customers save more easily for retirement.

The regulator said that the complexity of choosing their own investments from a wide range of funds can make it hard for some customers to select investments that meet their retirement needs.

Under the proposals, the default option would need to be an “appropriately diversified basket of investments” and take account of climate change and other environmental, social and governance risks.

As a customer approaches retirement, their investments would need to be changed to lessen the impact of any market downturn on their savings.   

Under the proposals, non-workplace pension providers will also have to warn customers holding high levels of cash and prompt them to consider investing in other assets with the potential for growth.

Sarah Pritchard, executive director for markets at the FCA, 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 of our wider work on pensions which is designed to ensure that customers are better supported throughout their pension journey.”

The FCA consultation closes on 18 February and can be found online on the FCA website. 

Andrew Tully, technical director at Canada Life, said: “Helping non-advised customers make good investment decisions, and not simply hold pension funds in cash over the long-term, are sensible suggestions from the FCA.

"However it is important these changes have minimal impact on the advised market, where advisers help clients make investment choices appropriate to their individual circumstances. It also seems a little odd that the FCA suggests default funds should include lifestyling. Many clients will move into drawdown as they start to access their pension, and lifestyling may not be an appropriate choice in those circumstances.” 

Helen Morrissey, senior pensions and retirement analyst at Hargreaves Lansdown, said: “While many people in a non-workplace pension are more than happy to choose their own investments there will always be those who don’t have the confidence to make these choices. The use of so-called default funds can help these people by providing a robust central point to people’s retirement planning that they then build on with other investments and tax wrappers. From this point of view the proposals are a positive with the potential to bring real innovation.

"However, we must not forget the provision of high-quality guidance is also vitally important in empowering people to make more informed investment decisions throughout their retirement planning journey. People’s needs change and with the right education we can ensure they are able to make the appropriate ongoing changes to ensure they reach retirement in the best financial shape possible.”