Members are increasingly looking to trustees for guidance on making the most of their pension pots but complex regulation is making it difficult. James Phillips looks at how far trustees can go in helping members
At a glance
- Trustees are increasingly wary of being on the hook for advice
- But there are ways for trustees to safely give guidance to help members
Confusing and convoluted regulation is dissuading trustees from helping their scheme members to make the most out of their pension pots.
Yet, members are increasingly looking for advice or guidance on their pension savings. Two-thirds of savers are worried they are simply not saving enough, according to a recent survey by the National Employment Savings Trust (NEST).
Meanwhile, 60% of savers expect they will need at least 50% of their current income during retirement, but the current average pension pay-out is just 29%.
Speaking at Pensions and Benefits UK 2016, trustee of multiple pension schemes including Royal Mail and the civil service Allan Course voiced concerns that regulation on guidance trustees can give is long and convoluted.
He said: "The gospel according to The Pensions Regulator (TPR) is longer than the combined words of the Bible and the Koran."
However, surveys of savers found many are not well-informed and need guidance. Less than 5% of savers would pay more than £100 for independent financial advice, according to 2012 research by CoreData Research, but the going rate for these advisers is £150 per hour. The same survey found just 12% have spoken to independent financial advisers (IFAs).
Burden on trustees
This lack of engagement with independent advice is placing a larger burden on trustees to deliver appropriate information to members, particularly since the pension freedoms came into being last year.
But trustees are holding back in fear of breaching Financial Conduct Authority (FCA) regulations.
The biggest confusion comes from the FCA's differentiation between 'guidance', which trustees can give, and 'advice', which they cannot.
But the difference between these two concepts is not obvious. Course turned to the dictionary in an attempt to find a simple and clear difference. He was disappointed with the results – the definitions of both words referencing the other.
He found advice is defined as "guidance or recommendations offered with regard to prudent action". Meanwhile, guidance is defined as: "advice or information aimed at resolving a problem or difficulty, especially as given by someone in authority".
So how do trustees get clarity and ensure they are not opening themselves up to potential litigation while helping their members as much as they can?
Course said: "A court would use the 'duck test'. If it feels like advice as opposed to guidance, it probably is advice."
He argued that the semantics when offering help are particularly important.
He said: "We strongly recommend that you consider doing 'x' is guidance."
In this example, Course believes including the word 'consider' is the difference between guidance and advice, as it suggests the member thinks about doing something, rather than actually do it. Another suggestion is to include a note with communications, recommending members get independent financial advice.
But aside from semantics, trustees still need to be careful around the guidance they give, as providing answers to the wrong kind of questions could land trustees in trouble if something goes wrong for the member.
Course argued trustees should be able to avoid this as long as they apply common sense and do not advise on anything outside of their expertise.
He said: "Do not give advice or guidance on matters outside of the occupational scheme, and don't give specific advice to individual members. For a member to bring a successful case, they would need to demonstrate the advice had been specific, they had acted on it, and it had been inappropriate at the time it was given.
"Trustees worried about being sued are worried unnecessarily."
This is backed up by the FCA's own guidance, which warns trustees to not offer specific investment advice, or to advise on conversion, transferral or cashing out of safeguarded benefits.
It says: "A professional firm cannot recommend to a private client that he buy a life policy, unless he is endorsing a corresponding recommendation given to the client."
It adds that trustees giving guidance should not request payment for providing the guidance.
Nevertheless, once agreeing what guidance is, trustees need to make sure they are actually communicating effectively with members. Course argued trustees need to re-evaluate their approach to talking to members about pensions.
He said: "Information and education are much less effective than we think. Trustees still have to get their [members'] attention. Appeal to the heart not the head."
Course continued by suggesting trustees use the stories of engaged members to appeal to the unengaged.
He said: "Trustees do not use anywhere near enough peer group persuasion. Employees trust their chums and their colleagues, and people they can identify with, rather than their bosses or trustees."
"Think of different ways of communicating with members. The old ways haven't worked well enough."
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