The Pensions Regulator is in talks to revamp its guidance on communicating retirement flexibilities. Jack Jones looks at what trustees can expect.
Much has been said and written about how to make sure defined contribution (DC) members are best equipped to use the retirement flexibilities introduced this year. In the rush to write regulation before the policy came into force in April there was also plenty of confusion.
But guidance published by the Financial Conduct Authority (FCA) in late February, and The Pensions Regulator (TPR) the following month, went some way to clarifying providers' and trustees' duties.
The two watchdogs took markedly different views over what should be communicated to members, however. The FCA instructed providers to give out bespoke risk warnings, taking account of factors like a member's health and the tax implications of any decisions they took.
TPR however, seemed content for trust-based schemes to give members a generic warning about the main ways of accessing their pension pot now available to them. The difference between the two regulators raised a few eyebrows but schemes knew what was expected of them.
The guidance published in the spring is not the final word on the matter, however. The FCA made it clear that its document was up for review, and speaking at Pensions and Benefits UK this earlier month, TPR chairman Mark Boyle said his organisation was in talks with the government and its fellow regulator over changes to its guidance.
Boyle defended the "limited" gap between the watchdogs at present, but said he was keen to align the guidance as much as possible. A potential worry for schemes that have got comfortable with TPR's rules is that the regulator is looking at moving closer to the FCA's position, rather than the other way round.
Boyle said: "It is the difference in the roles and responsibilities of a trustee from those of a provider that have led to a different approach to risk warnings. Trustees look after scheme assets on behalf of all of the members collectively, rather than having a direct commercial relationship with each member, as a provider does.
"These differences are driven by the legislation that applies to trustees on one hand, and the legislation and FCA rules that apply to providers, on the other."
The TPR chairman added that he understood the concerns trustees had about being "on the hook" for guidance that could be taken as advice. But he said schemes that intended to offer the whole range of flexibilities could find themselves subject to more stringent requirements in future.
He said: "For the larger DC schemes and master trusts that plan to offer the full suite of draw down options to members, we are discussing with Department for Work and Pensions and the FCA whether our guidance to these schemes should also be to offer specific risk warnings, which would be as similar as possible to the FCA's ‘second line of defence' for providers."
Boyle said the industry would be consulted ahead of any change, but added: "The key thing is that - whatever the regulatory structure - we as regulators and related agencies work much more actively and collaboratively together in a demonstrably joined-up way."
So what can bigger schemes expect in this consultation? The FCA wants providers to "personalise... warnings to the individual and the choice they are making by asking a series of questions and actively engaging with the customer". It says firms should consider factors such as the state of a consumer's health; tax implications; the impact on means-tested benefits; and investment scams.
People's Pension head of policy and market engagement Darren Philp says in many ways he would welcome an alignment of regulation: his parent company B&CE runs a stakeholder scheme as well as its master trust, and therefore falls under both regimes at the moment.
"Having two different schemes is incredibly unhelpful," he says. "A DC pot is a DC pot, whether it's in a trust-based or contract scheme."
But while Philp would welcome more joined up regulation he is concerned that the FCA approach is overkill for members accessing small pots. He says TPR would be making a mistake to adopt similar rules without introducing an element of proportionality. He has previously argued that providers should be exempted from the more stringent requirements for members with pots below £10,000.
"We can certainly see the need for risk warnings and good communications," he says. "But the risk warnings need to be proportionate to the size of the pot. Do you really need to go through all of this information about securing an income for life with people with very, very small pots?"
Philp also has concerns that a one-size-fits-all approach would see providers that sell members retail retirement income products and those that do not subject to the same regulations. But ultimately he agrees with Boyle that the two regulators need to be sending out the same message.
"It's good that TPR are looking at aligning with the FCA," he says. "The most important thing is that they come to a common position on this and communicate that to market."
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