Do employers have their second line of defence ready?

23rd March 2015

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

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.

Although Pension Wise will provide guidance in relation to accessing pension savings, the regulators now consider the risk to consumers in this area to be great enough for additional protections to be required from April 2015.

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. tPR also requires trustees and pension managers to signpost employees to Pension Wise and to make a statement that they should consider 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.

If a workplace pension scheme is contract based, a provider will have to ensure they meet the FCA’s risk warning requirements. If it regulated by tPR, trustees and pension managers need to follow the guidance suggested by them despite it being a lesser standard than the FCA. However, it seems to us that this may lead to confusion and inconsistency especially if employers operate difference schemes.

Whichever routes an employee follows; it is likely that they will turn to their employer to ask for more help in understanding the risks that have been outlined.

And so, the question is ‘are employers 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 may lead to even more employee confusion and strain on employers support functions. A simple answer could be to partner with an expert educational provider 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, which will help employees and members to have a better understanding when making these important decisions.”

For further information please contact us.