Cashpoint drawdown and risk warning showdown

23rd March 2015

Is your second line of defence ready?

The Financial Conduct Authority (FCA) and the Pensions Regulator (tPR) have very recently published new rules and guidance for contract and trust-based pension schemes to be followed from April 6^th, recognising that freedom and choice in pensions carries risks for pension scheme members and the protection in place at present is not strong enough.

Why?

Your employees now have much greater choice about how they access their pension savings with many perhaps expecting to be able to use their pension like a bank account, the so called cashpoint pension.

Both regulators are concerned that if employees do not fully understand these important and sometimes irreversible decisions, they could make fundamental mistakes which may have tax consequences, impact state benefits or expose them to pension fraud and scamming.

These concerns are shared by the House of Commons Work and Pensions Committee who have identified the increase in risks to individuals posed by the new pension flexibilities.

Although Pension Wise provides guidance in relation to accessing pension savings the regulators now consider the risk to consumers in this area is great enough for additional protections to be required from the April 2015 changes; a sentiment echoed by the Work and Pensions Committee who question how meaningful a 45 minute guidance session can be in isolation.

However, even if the message is clear and both the FCA and tPR believe any delay in introducing rules would increase the risk of poor outcomes for large numbers of consumers, the strength of their responses and requirements of the regulatory changes is rather different and in our view inconsistent and not all pension savers will be treated equally.

Risk warning showdown

Firms regulated by the FCA will have to ask customers who want to access their pension savings on an execution only basis whether they have accessed the pensions guidance or received regulated financial advice. If the answer is no, or they are unsure then they must be encouraged to use the pensions guidance or to take regulated advice.

In addition, they must highlight risks that are specific to the individuals. For example, if interested in an annuity, they must ask questions including whether they have shopped around or if they understand the effect of inflation erosion on their income and provide an appropriate warning to the individual about the consequences that can result from these and other risks.

tPR also requires trustees and pension managers to signpost employees to Pension Wise and regulated advice as a minimum but that is where the similarity ends as, unlike the FCA, they do not insist on risks specific to individuals being highlighted, instead encouraging the provision of generic warnings about a limited number of risks only.

We think this is significant, as there is no reason to believe pension savers will fully grasp the significance of the generic risks being put to them. Indeed the Work and Pensions Committee described the ‘general low level of savers’ understanding of retirement savings and financial products’.

What does it mean for you as an employer?

If your workplace pension scheme is contract based your provider administered by an FCA authorised firm will have to ensure they meet the FCA’s risk warning requirements. If you are regulated only by tPR, trustees and pension managers need to follow the guidance suggested by tPR despite it being a lesser standard than the FCA. However, it seems to us that this may lead to confusion and inconsistency especially if you operate different schemes. In fact the FCA stated that in the spirit of treating customers fairly, they should encourage the firms they regulate that run trust-based DC schemes to give those members the same risk warnings as customers of the contract-based schemes they operate. The approach of the FCA makes sense; providing consistency in the way risk warnings are delivered.

Whichever one of these routes your employees follow it’s likely that they will turn to you, your HR, Reward or Pension team and ask for more help in understanding the risks that have been outlined.

And so the question is ‘are you ready to offer a second line of defence?’

Jonathan Watts-Lay, Director, WEALTH at work – leading providers of financial education, guidance and advice in the workplace comments, “A lot of employers are not geared up to offer the full range of options made possible by the new pension freedoms. These latest regulatory requirements are welcome if delivered properly but they may lead to even more employee confusion and strain on employers support functions. A simple answer could be to partner with an expert educational partner who is used to delivering guidance in this area, supporting a consistent journey on the route to retirement savings access.”

He adds, “We can provide this as part of our wider financial education and retirement income options service. Using our service helps your employees to get informed about making these important decisions.”

For further information please contact us.